What Does Removing Contingencies Mean in Real Estate?

In real estate transactions, a purchase agreement often includes specific conditions that must be met before the sale becomes final. These conditions, known as contingencies, serve as protective clauses, allowing buyers or sellers to withdraw from the contract without penalty if certain criteria are not satisfied.

What Are Real Estate Contingencies?

Real estate contingencies are predefined conditions that must be fulfilled for a real estate contract to proceed to closing. They provide a contractual escape route, protecting buyers and sometimes sellers from unforeseen circumstances that could make the purchase undesirable or impossible. These clauses are negotiated and included in the purchase agreement.

A common type is the financing contingency, which makes the sale dependent on the buyer securing a loan for the property. This protects the buyer from being obligated to purchase if they cannot obtain the necessary mortgage. The contingency specifies a timeframe within which the buyer must receive loan approval. If the buyer’s loan application is denied within this period, they can withdraw from the contract without losing their earnest money deposit.

An inspection contingency grants the buyer the right to have the property professionally inspected. This allows for a thorough evaluation of the home’s condition, identifying any structural issues, system malfunctions, or necessary repairs. If the inspection reveals significant problems, the buyer can negotiate with the seller for repairs, request a price reduction, or terminate the contract within the stipulated timeframe. This clause safeguards the buyer from acquiring a property with undisclosed or costly defects.

The appraisal contingency ensures that the property’s appraised value meets or exceeds the agreed-upon purchase price. Lenders require an appraisal to ensure the property serves as sufficient collateral for the loan amount. If the appraisal comes in lower than the sales price, the buyer may renegotiate the price with the seller, pay the difference in cash, or, if the contract allows, withdraw from the deal. This protects the buyer from overpaying and the lender from lending more than the property’s market value.

A sale of existing home contingency protects buyers who need to sell their current residence to finance the new purchase. This clause makes the new home purchase contingent upon the successful sale and closing of the buyer’s existing property within a specified period. Without this contingency, a buyer could face the financial burden of carrying two mortgages simultaneously if their current home does not sell. Sellers often view such offers as less appealing due to the added uncertainty and potential for delay.

The Process of Removing Contingencies

Removing contingencies is a formal step in the real estate transaction, signifying that the conditions set forth in the purchase agreement have been met or waived. This process involves the buyer demonstrating that the requirements of each contingency have been satisfied. Buyers engage in due diligence, such as obtaining full loan approval, completing comprehensive property inspections, and reviewing appraisal reports, all within the agreed-upon timelines.

Once the buyer has completed their investigations and is satisfied with the results, they formally notify the seller of the contingency removal. This notification is done in writing, often using a “contingency removal form” or an addendum to the original purchase agreement. This document serves as a legal record that the buyer is moving forward with the purchase, accepting the property’s condition or the financing terms.

For a financing contingency, the buyer, having secured a loan commitment from their lender, would provide documentation of this approval to the seller. Similarly, after a home inspection, if the buyer is content with the property’s condition or has negotiated satisfactory repairs with the seller, they would remove the inspection contingency. The process involves signing the removal form and delivering it to the seller or their agent.

In the case of an appraisal contingency, once the appraisal report confirms the property’s value is at or above the purchase price, or if the buyer agrees to cover any appraisal gap, this contingency can be removed. The removal occurs once the buyer has reviewed the appraisal and is prepared to proceed. The seller then acknowledges receipt of the removal notice, marking a significant step closer to the closing date. This active removal process ensures that contingencies do not expire passively, requiring deliberate action from the buyer.

Implications of Contingency Removal

The act of removing contingencies carries implications for both the buyer and the seller, shifting the risk and commitment within the real estate transaction. For the buyer, removing contingencies signifies a more binding commitment to the purchase. Once a contingency is removed, the buyer loses the contractual right to withdraw from the deal based on that specific condition without facing financial penalties. This places their earnest money deposit at greater risk, as it may become non-refundable if the buyer subsequently defaults on the contract.

For the seller, the removal of contingencies provides increased certainty that the sale will proceed to closing. Each contingency removed reduces the likelihood of the deal falling through, allowing the seller to plan their own relocation or subsequent purchases with greater confidence. This progression signals to the seller that the buyer is serious and has overcome the major hurdles associated with the purchase. A transaction with all contingencies removed is a more stable and predictable one for the seller.

If a buyer fails to remove a contingency within the specified timeframe, or if the conditions of the contingency are not met, the contract may be subject to termination. For instance, if a buyer does not secure financing by the deadline of a financing contingency, the contract could become void. In such scenarios, the earnest money deposit’s fate depends on the contract’s specific terms and the reason for non-fulfillment. It may be returned to the buyer if the contingency allowed for withdrawal under those circumstances, or it could be forfeited to the seller as liquidated damages.

The decision to remove a contingency should be made carefully, ensuring all due diligence has been completed and the buyer is fully prepared to commit to the purchase. Removing contingencies prematurely, without having all necessary information or approvals, can expose the buyer to considerable financial exposure. Real estate professionals advise buyers to only remove contingencies once they are satisfied that all conditions have been met.