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“Contingency” – What does contingency mean for real estate?

Eric Stewart January 17, 2019

What does the word “contingency” mean in sales, especially in real estate?

Contingency is a simple word from Latin roots meaning to hold together. Wait, if it means to hold together, why is it known as a way out of a contract? Well, consider buying real estate without any contingencies. Would you purchase a home if you couldn’t inspect it, do an appraisal, or check for termites? Or have a loan contingency if you need to get a mortgage? No, hopefully you wouldn’t. You need the contingency to hold the contract together even though, if a contingency isn’t fulfilled, the contract will die.

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The contract is held together by a promise between the buyer and the seller in real estate – that the buyer will pursue financing, inspections, etc., and that when the settlement date arrives, the seller will provide the property in substantially the same condition as at the time of purchase. The buyer and seller also agree that to move forward with the contract, they will resolve any home inspection issues, with the buyer accepting the home “as is”, the seller agreeing to fix the items of concern, or some sort of compromise.

I sell over 150 homes a year and in a “normal” real estate transaction, I see contingencies all the time. They’re a way for the buyer to purchase the home and pre-agree that certain conditions have to be met for settlement to occur, and the seller is willing to grant those contingencies.

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Recently I sold a home to a couple moving from Boston, MA. They purchased a home non-contingent on the sale of their existing home, meaning they would buy the property whether their current home in MA sold or not, but they did ask for the following contingencies:

  • A home inspection to check the condition of the property
  • A termite inspection to make sure those little critters hadn’t eaten up the walls or floor joists
  • A financing contingency to be sure the lender would give them a mortgage
  • A home appraisal to make sure the property was worth what they were paying for it from a licensed appraiser’s standpoint

All four contingencies were met, settlement occurred, and everyone was happy.

To win in a multiple contract scenario against other buyers, sometimes you have to consider which contingencies you have to have. Recently I sold a property where a purchaser did an inspection of the property prior to even submitting an offer on the home. This way, the seller got an offer from the buyer knowing up front that the buyer wasn’t going to now negotiate for something further on the home inspection, since the home inspection was already resolved. In that case there were just a couple of contingencies on the contract – for financing and the settlement of the buyer’s current property.

Contingencies are normal and expected in real estate. Remember this though: If there are contingencies, there are deadlines. On the average real estate contract, time is of the essence, so if you miss a deadline by a minute, you’ll have lost that contingency and won’t be able to get it back. Make sure you observe the contingencies carefully whether you’re a buyer or a seller, and you’ll have a very happy selling experience.

I’m Eric Stewart, Pointing You Home. For more information on real estate and related topics, listen my radio show on Sunday mornings at 8am on 105.9 FM/630AM on WMAL.

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