Real Estate Contract Contingencies

When purchasing or selling a home, the word contingency is one you will hear often. These contingencies protect the Buyer and Seller during the contract process and essentially give the parties the right to back out of the contract under certain circumstances. These contingencies also play a part in protecting the earnest money of the Buyer. Earnest money is submitted by the Buyer as a “good faith” to the Seller and will typically be 1-2% of the list price of the home, (i.e. $300,000 list price will require  $3-6,000 earnest money). The earnest money is held in an escrow account and will be credited to Buyer at closing. The most common types of contingencies are; inspection contingency, appraisal contingency, financing contingency and sale of home contingency.


Inspection Contingency – Also called “due diligence” gives the Buyer a certain timeframe, usually 10-12 days to perform an inspection. An inspector will inspect the property and provide a report on their findings to the Buyer. The Real Estate Agent and Buyer will then discuss the findings and suggest repairs to the Seller. If the Seller and Buyer cannot agree on repairs the Buyer has the right to terminate the contract with no legal consequence and earnest money is returned to the Buyer.


Appraisal Contingency – The appraisal contingency protects the Buyer and ensures the property is valued at the contracted amount. The timeframe for this contingency differs, but will typically be between 21-25 days. The appraisal must be done during this timeframe. If the property does not appraise for the contracted value and the Seller does not reduce the price of the home to the appraised value, the contract can be terminated and the earnest money, in most cases, is returned to the Buyer. If the findings of the appraisal are provided to the Seller outside of the original timeframe the Buyer is legally obligated to purchase the home at the appraised value.


Financing Contingency – The financing contingency gives the Buyer a specific timeframe, again typically 21-25 days to apply and obtain final approval for the purchase of the property. We refer to this as “Clear to Close”, which means you have cleared all the hurdles and are approved to close on your new home! In the event the Buyer does not qualify for a loan and is outside of the original timeframe the Buyer is at risk to have to purchase the home and forfeits their earnest money.


Sale of Home Contingency – Although it is much easier to sell before buying another home it doesn’t always work out that way. A sale of home contingency allows the Buyer to go under contract on a new home while also selling their current home. It essentially protects the Buyer from having to pay 2 mortgages. If for any reason the contract on the current home terminates then this contingency allows the Buyer to also terminate the contract on the new home they are purchasing. In this type of contingency, the Seller also has a level of protection in that they have a “Kickout Clause”, which states the Seller can continue to market the home and if another qualified Buyer submits a more attractive offer, the Seller can Kickout the current contract and move forward with another Buyer.


In summary, contingencies play a vital role in any real estate contract and it is important to have a real estate professional in your corner ensuring you are always protected. If you are looking for a team who always has your back, look no further than The Peters Company. We are looking out for your best interest and will be in your corner at all times!


  • Kalen Vanderhorst

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