What Is a Contingency Sale and How Does It Work?

A contingency sale in real estate refers to a transaction where the completion of the sale is dependent on certain conditions being met. These conditions are pre-agreed upon by both the buyer and the seller and are formally included in the purchase agreement. The purpose of these conditions is to offer protection to either party, ensuring they can withdraw from the contract without penalty if specified events do or do not occur. This article will explore what these sales entail and how they function within a real estate transaction.

What a Contingency Sale Means

A contingency sale signifies that the real estate contract is not yet fully binding until specific conditions, known as contingencies, are satisfied. These conditions act as safeguards, allowing either the buyer or the seller to terminate the agreement if the stipulated terms are not fulfilled within a defined timeframe. Contingencies provide an “out” or protection, preventing parties from being locked into unfeasible transactions.

Contingencies are included in the purchase agreement, making the contract’s enforceability dependent on these terms. For instance, if a contract includes a financing contingency, the buyer’s obligation to purchase the home is contingent upon securing a mortgage loan. Should the buyer fail to obtain the necessary financing, the contingency allows them to withdraw from the deal, without forfeiting their earnest money deposit.

Common Contingency Types

Understanding contingency types shows how they protect parties in a real estate transaction. These clauses address common concerns and risks associated with buying and selling property. Each type serves a distinct purpose, offering a specific pathway for contract adjustment or termination.

Financing Contingency

A financing contingency, often called a mortgage contingency, makes the sale dependent on the buyer securing a loan for the property. This provision protects the buyer from losing their earnest money deposit if they cannot obtain the necessary mortgage approval. This contingency includes a specified period for the buyer to obtain loan approval. If financing falls through within this period, the buyer can terminate the contract and receive their earnest money back.

Appraisal Contingency

An appraisal contingency ensures that the home’s appraised value aligns with the agreed-upon purchase price. Lenders will not finance a home for more than its appraised value, protecting the buyer from overpaying. If the appraisal comes in lower than the purchase price, the buyer can negotiate with the seller for a price reduction, pay the difference out-of-pocket, or withdraw from the contract, retaining their earnest money.

Inspection Contingency

The inspection contingency allows the buyer to have the property professionally inspected for any defects or issues. This provides an opportunity to uncover significant problems before finalizing the purchase. This contingency allows the buyer to request repairs, negotiate a price reduction, or cancel the contract if unsatisfactory issues are found. The timeframe for an inspection contingency is short, often ranging from 7 to 14 days after contract acceptance.

Sale of Existing Home Contingency

A sale of existing home contingency means the buyer’s purchase of the new property is conditional on the successful sale of their current home. This contingency is important for buyers who need the proceeds from their existing property to finance the new purchase or avoid managing two mortgages simultaneously. While providing a safeguard for the buyer, this contingency can make an offer less appealing to sellers due to added uncertainty and potential for delays. Sellers might include a “kick-out clause” allowing them to accept another offer if the buyer’s home is not sold within a specified period, giving the initial buyer a short window to waive their contingency.

The Process with Contingencies

Once a purchase agreement with contingencies is signed, the real estate transaction enters a phase where these conditions must be addressed within predetermined timeframes. Each contingency has a specified period, referred to as the contingency period, during which it must be satisfied. This period is mutually agreed upon by the buyer and seller and is clearly outlined in the contract.

Fulfilling contingencies involves meeting the agreed-upon conditions. For example, under a financing contingency, the buyer must pursue loan approval from a lender. If the buyer successfully secures financing, or if an inspection reveals no significant issues, the contingency is considered met.

Once a contingency is satisfied or if the buyer chooses to proceed despite an unmet condition, it is formally removed or waived. This is done through a written notice signed by the buyer, signaling their commitment to the purchase. Removing contingencies strengthens the contract, moving the transaction closer to closing and making the buyer’s earnest money deposit non-refundable for reasons related to that specific contingency.

Should a contingency not be met within its specified timeframe, it can lead to the termination of the contract. For instance, if a buyer cannot obtain financing by the deadline, or if an inspection uncovers severe, unresolvable issues, the contract may be canceled. In such cases, the buyer has the right to receive their earnest money deposit back, as the failure of the contingency provides a contractual basis for withdrawal. Conversely, if a buyer fails to meet a deadline or backs out for a reason not covered by a contingency, they may forfeit their earnest money. Communication between all parties, including buyers, sellers, and their agents, is important throughout the contingency period to ensure requirements are understood and addressed promptly.