Stringent and Contingent

From trapeze artists to baseball spectators seated behind home plate, everyone appreciates a good safety net. Homebuyers and sellers are no exception, which is why contingency clauses continue to be popular for real estate contracts.

A contingency works as a safeguard in a contract. It defines a condition or action that must be satisfied or performed in order for a contract to be binding. If the action doesn’t happen or is unacceptable to one party, the purchase agreement becomes null and void or can be renegotiated.

Contingency clauses are typically written in favor of buyers, as a means of protecting them from certain risks by removing unknowns.

In general, “the party in the advantageous position – which has overwhelmingly been the buyer over the last several years – has more leverage in asking for concessions and contingencies,” says Mark Warden, Realtor at Allison James Estates and Homes in Nashua, N.H.

Today, the most common contingencies for buyers involve financing, home inspections and selling an existing home.

With financing contingencies, unless it’s a cash transaction, the purchase is conditional upon the buyer obtaining mortgage financing.

Home inspection contingencies usually state that if the inspection uncovers something undesirable, such as an unstable foundation or pest infestation, the buyer can rescind the offer and receive his or her deposit money back.

The existing home contingency releases buyers from a contract if they can’t sell their homes first.

“We always recommend a 21-day or longer finance contingency and a 14-day or longer appraisal contingency,” says Josh Moffitt, president, Silverton Mortgage Specialists, Inc., Atlanta. “We feel this best protects our buyers and allows enough time to accomplish the needed items during contingency.”

For sellers, the most common contingency today involves the seller finding suitable housing, says Scott Clifford, attorney with Epstein, Lipsey and Clifford, P.C., Hanover, Mass.

“This allows them to enter into a contract for the sale of their home, but leaves them the flexibility of terminating the contract if they cannot find suitable housing without risking being out on the street with no place to live,” Clifford says.

Additionally, the seller may have a contingency that the sale is subject to the approval of a lender who has a lien on the property, says Mark Stapp, executive director of the master of real estate development program at the W.P. Carey School of Business at Arizona State University, Tempe, Ariz.

In general, Stapp says, “sellers want no contingencies, and buyers want as many as possible. But buyers may find it difficult to have offers accepted if they have many, unusual or over-reaching contingencies.”

Examples of unreasonable contingency clauses include asking the seller to: indemnify the buyer against all defects of the property; be responsible for paying to fix all title defects; and allow the buyer up to the date of closing to obtain financing, which could cause the deal to fall through last-minute.

Most forms used these days are standardized and have built-in contingency clauses that can be checked or unchecked as needed, making it relatively easy for buyers or sellers to add a contingency to a purchase offer or contract. But complicated contingencies should be reviewed and handled by a real estate attorney.

“You should always have a licensed attorney who practices in real estate review the contract before you sign it, regardless of whether it contains a contingency clause,” Clifford says.

Basically, any contingency is acceptable, so long as both parties agree.

“The key is to make sure the clause is very clearly written, that there are defined metrics (so you know when and if the contingency is satisfied) and that they are achievable in the agreed timeframe,” Stapp says.

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