5 Contingency Clauses Buyers Should Know

What’s a Contingency?

When a buyer makes an offer on a house or piece of property, it’s typically a conditional offer. This means that certain conditions or stipulations must be met before the buyer makes good on their offer. These conditions are called contingencies.

A contingency is written into the purchase agreement/contract and therefore becomes part of your offer. As such, contingencies only become valid once your offer is accepted. This makes your offer “contingent upon” whatever conditions you’ve specified.

When the conditions of a contingency aren’t met, you usually can back out of the deal and get your earnest money deposit back. This is why they are often referred to as “walk-away clauses.”

Learning about the most common contingencies will help you make competitive and attractive offers while also protecting your interests.

The Most Common Contingencies

Almost all real estate purchase offers contain contingencies, and sellers will expect to see then in the contract. Some of the most common types of contingencies include the following:

Inspection Contingency

An inspection contingency allows you to send in a professional inspector, and sometimes trades professionals, to evaluate and test the home (within reason). It also allows you to more closely examine the condition of the house yourself.

Home inspectors perform a comprehensive evaluation of the entire house. The inspection will tell you, among many other things, the condition of the mechanical equipment like the water heater, furnace and AC. Also, because many Northern Michigan homes have their own wells, a well inspection is often a good idea.

This is a very broad contingency. If any problems are found during your inspections, you will have the opportunity to negotiate repairs, reduce your offer price, or back out of the deal altogether.

Financing or Mortgage Contingency

This contingency stipulates that you must be able to obtain the necessary loan before purchasing the home.

It’s important to remember that this is a step beyond a pre-approval.

Your lender will go through the underwriting process as a final step to assess its risk before you can get full approval.

Appraisal Contingency

As part of the underwriting process, your lender will order an appraisal of the property. A licensed appraiser will then determine the full value of the property.

If the property appraises for less than the loan amount, you will have to make up the difference in cash or walk away. You also may try working with another lender if you have enough time. Otherwise, you can try to negotiate an extension with the seller.

Attorney Review Contingency

An attorney review contingency is a fairly straightforward condition. It stipulates that your attorney (hopefully a real estate lawyer) must review and approve the purchase agreement prior to closing on the sale. Since most agents do not have a law degree, it’s in your best interest to have your attorney review the paperwork to make sure there are no mistakes or omissions.

Home Sale Contingency

With a home sale contingency, your offer is subject to the sale of your current home within a certain time period.

While this is a common contingency, it typically isn’t one that sellers like to see in an offer. Including this type of condition will risk your offer being rejected.

Making a Contingent Offer

Ultimately, the types and amount of contingencies that you include in your offer are entirely up to you. But it’s important to remember that there are always tradeoffs to consider with these provisions.

Contingencies are useful for protecting your interests in the deal. That’s why it’s highly recommended to always include an inspection at the very least.

But including unreasonable or too many conditions can quickly turn off a seller. When this happens, you may not get a second chance at a deal.

It’s important to work together with a knowledgeable realtor who’s a skilled negotiator. You may also want to seek advice from a real estate attorney. Working together, you’ll be able to determine the best contingencies that are fair and right for you.