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Why home buyers need contingencies

Published: Oct 14, 2009

Anyone who is thinking of purchasing a home or has ever owned a home has heard about contingencies. What are contingencies?

Contingencies are clauses in a real estate contract that stipulate various conditions that must be met by the buyer and the seller for a sale to go through. For example, many buyers write into the contract that being able to close on the sale of their own home is a condition of the offer to purchase the new home. That way, if the sale of their own residence falls through, they will not be obligated to go through with the purchase of the new property.

For buyers, contingencies are important because they can cover them should they be unable to fill the obligations of the contract, or should they decide that they no longer want to purchase the property.

Some buyers -- especially in heated markets where several people may be interested in buying a particular home -- may be tempted to do without contingencies, in order to make themselves look more appealing to the seller and to win in a bid for the home.

But that's not a smart move -- it's essentially like working without a safety net. A contingency is a buyer's backup plan -- if a buyer is working with a good real estate attorney or a smart real estate professional, he will have several contingencies written into the contract to back him up.

After all, when you sign a contract to purchase a home, several thousand dollars -- and possibly, several hundred thousand dollars -- are at stake. Those aren't small potatoes.

These are some of the more prevalent buyer contingencies that are written into contracts, and some you may want to consider writing into your own contract should you think about purchasing a home:

  1. Mortgage financing contingency

    This contingency gives the buyer a way to back out of the contract if an application for financing is denied, or if financing is granted for a lesser amount (say, if the home appraises for less than expected).

  2. General inspection clause

    This contingency allows a buyer to bring in a professional home inspector to inspect the property, and to cancel or renegotiate the deal (e.g., to negotiate a lower selling price with the seller, or to ask him to complete needed fixes to the home) if the inspection turns up less than satisfactory results -- such as significant structural flaws and major (and costly) repairs that are required.

    This clause offers great protection to buyers -- because as we all know, while a home could look great on the surface (e.g., if it was staged or if the seller went to great pains to make cosmetic -- but not major -- fixes), there could be unexpected and expensive problems lurking underneath.

  3. Contingencies for additional tests

    Buyers may want to add contingencies that allow them to have the home inspected for radon, mold and other toxic substances, and for wood-destroying pests like termites. If any problems are found, this contingency should give the buyer the opportunity to renegotiate the deal, or cancel it completely.

  4. Attorney review contingency

    This clause can give the buyer and the seller a specific amount of time (as specified in the contract) to have their attorneys review the signed contract. The lawyer will review the legality of the contract and check for important safeguards.

  5. Sale of buyer's home contingency

    This contingency allows the buyer to cancel the contract (without penalty) if he or she is unable to sell his or her home in a specified amount of time.

  6. Appraisal contingency

    This clause permits the buyer to have the home appraised and to only follow through with the purchase if the appraisal matches or exceeds the home's price.

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The real estate contract is the most often used, yet least understood tool in the real estate business. Whether you are a rank beginner or seasoned expert, there is no excuse for not knowing and understanding the real estate contract. Real estate contracts ...

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