Contingencies in a Real Estate Agreement
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UPDATED: Feb 20, 2013
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When you enter into a real estate deal to buy or sell a home, generally the process starts with the buyer making an initial written offer. This can then progress to a purchase and sale agreement and finally to a completed transaction. Often, however, while both buyer and seller want the transaction to occur, there are a number of potential problems or obstacles that can get in the way of the deal going through. These potential problems need to be addressed in contingency clauses in order to protect both buyer and seller.
What are Contingency Clauses?
Contingency clauses in a real estate contract are clauses put in to allow either the buyer or the seller to walk away from the real estate transaction without penalty if a particular event should happen. They act as escape clauses so that neither a buyer nor seller has to go through with a deal that has become disadvantageous.
Two of the most common examples of contingency clauses used in real estate contracts include inspection clauses and financing clauses. An inspection clause is included in an offer or contract by the buyer and stipulates that the buyer’s offer to purchase is contingent or dependent upon the results of a home inspection. Including this clause is absolutely essential because if a home inspection turns up significant flaws or defects, such as an unstable foundation or mold, the buyer doesn’t want to get stuck having to purchase a bad property or lose his deposit. A financing clause is included making the deal contingent on the buyer getting a mortgage for the property. This too is often vital because otherwise the buyer could lose his deposit if the bank wouldn’t lend him the money for the property.
While many contingency clauses are designed to protect buyers, sellers may include contingency clauses as well. For example, a seller might make the agreement contingent on their ability to find and close on a new home to live in so the seller doesn’t end up with no roof over his head if he ends up being unable to find a suitable property.
While contingency clauses protect both parties to the transaction, it is important that they are carefully written so that neither the seller nor buyer is at an undue disadvantage. For sellers, for example, the more contingency clauses included for the buyer, the greater the risk that the sale won’t go through and that the seller will have taken his property off of the market and lost valuable sales time for no reason. To ensure that the appropriate clauses are included to protect everyone’s interests in a fair manner, it is best to work with an experienced attorney when drafting real estate documents containing contingency clauses.