What Contingencies Should Be Put in an Offer?

A contingency in a real estate offer is a condition that must be met for a purchase agreement to be binding. These clauses allow either party to withdraw from a transaction without penalty if the stated conditions are not met. Contingencies protect buyers and sellers against risks that could jeopardize the sale, providing flexibility and risk mitigation in a significant financial undertaking.

Key Contingency Types

A financing contingency makes the purchase agreement conditional on the buyer securing a mortgage loan. It protects the buyer from being obligated to purchase if they cannot obtain funds within a specified timeframe. Buyers can reclaim their earnest money deposit if their loan is not approved, preventing financial loss.

An inspection contingency gives the buyer time to have the property professionally examined. This identifies defects or issues with the home’s structure, systems, or components. If the inspection report reveals major problems, this contingency permits the buyer to negotiate for repairs, request a price reduction, or terminate the contract without penalty.

An appraisal contingency requires the property to appraise for at least the agreed-upon purchase price. Lenders require an appraisal to ensure the home’s value supports the loan amount, protecting both the borrower and lender. If the appraisal comes in lower than the sales price, this contingency allows the buyer to renegotiate the price with the seller or, if an agreement cannot be reached, to withdraw from the contract and receive their earnest money back.

A home sale contingency makes buying a new property dependent on selling the buyer’s current home. This protects the buyer from the financial burden of carrying two mortgages simultaneously. It is useful for those who need equity from their existing property to fund the new purchase.

A title contingency ensures the property has a clear and marketable title, free from liens, encumbrances, or ownership disputes. A title search uncovers such issues. This protects the buyer from inheriting legal or financial complications, allowing contract termination if unresolved title defects are found.

Other protective clauses can be incorporated into an offer to address specific concerns. An attorney review contingency grants legal counsel a period to examine and approve contract terms, ensuring the agreement aligns with the buyer’s interests before it becomes binding. An HOA document review contingency allows the buyer to review governing documents, financial statements, and rules, providing an opportunity to understand community regulations and financial health.

Operational Mechanics of Contingencies

Contingencies operate with specific timelines for fulfillment. Each contingency clause includes a deadline by which the condition must be met or waived. For example, inspection contingencies often have a period of 7 to 10 days, while financing contingencies may extend from 21 to 60 days. These periods maintain transaction momentum and prevent indefinite delays.

Contingency fulfillment requires specific actions or outcomes as outlined in the contract. For instance, a financing contingency is satisfied when the buyer receives a loan commitment letter from a lender. An inspection contingency is fulfilled if the buyer is satisfied with the property or if repairs are agreed upon by the seller. The buyer must diligently pursue these conditions to avoid defaulting on the contract.

Once a contingency’s conditions are met, or the buyer chooses to proceed, it must be formally waived or removed. This involves the buyer signing a written notice of removal, indicating intent to move forward. Removing contingencies signals to the seller that the buyer is fully committed to the transaction.

If a contingency is not met within the specified timeframe, and the buyer does not waive it, consequences follow. The buyer has the right to terminate the contract without penalty. In such cases, the earnest money deposit (a good-faith payment held in escrow) is returned to the buyer. Conversely, if the buyer removes contingencies and defaults without a valid reason, they risk forfeiting their earnest money deposit.

Factors for Including and Structuring Contingencies

Market conditions influence the inclusion of contingencies in an offer. In a buyer’s market, offers with multiple contingencies may be more readily accepted as sellers have fewer options. Conversely, in a competitive seller’s market, buyers often face pressure to submit offers with fewer or no contingencies to make their bid more attractive. Waiving contingencies in a hot market can strengthen an offer, but it also increases the buyer’s risk.

A buyer’s specific circumstances determine which contingencies are necessary. For instance, a buyer paying with cash may not require a financing or appraisal contingency, as they are not reliant on lender approval or valuation. Buyers who need to sell an existing property to finance their new purchase will likely include a home sale contingency. An individual’s personal risk tolerance also guides these decisions; some buyers prefer comprehensive protection, while others may accept more risk for a more competitive offer.

The characteristics of the property itself necessitate particular contingencies. An older home, for example, might warrant a more thorough inspection contingency due to hidden issues with aging systems or structures. Properties with unique features, shared driveways, or located within a homeowners’ association might require review contingencies for legal documents or HOA rules.

Clarity in language is essential when drafting contingency clauses. Ambiguous wording can lead to disputes and potential legal challenges between parties. Each contingency should precisely outline the conditions that must be met, the responsibilities of each party, and the specific timeframe for fulfillment. Legal counsel often reviews these clauses to ensure they are unambiguous and enforceable.

The inclusion and structure of contingencies affect the overall competitiveness of an offer. An offer with many contingencies or lengthy contingency periods can appear less appealing to a seller who desires a quick and certain closing. Conversely, a clean offer with minimal contingencies may stand out, particularly in a multiple-offer scenario. Balancing protection with competitiveness is a strategic consideration for any buyer.