Buyers often make an offer to buy a home before having sold their house. They need to sell their current home to have the downpayment to make the purchase. The offer to purchase is "conditional" on the sale of their home. That is a "contingency." Contingencies in real estate contracts narrow a buyer's or seller's obligation to perform the contract and close the deal.
In a sellers’ market sellers would not accept the contingency above. A potential buyer with a home to sell should already have their home listed AND have an accepted offer from a "ready, willing and able" buyer. In the current buyer’s market, sellers are likely to agree to such a contingency.
Professional Contract Review
Contingencies are a matter of negotiation. They are agreed upon by the parties. Perhaps the most important contingency is the attorney review period. This is a timeframe after the signing of the contract where the attorneys for each party review the contract and make suggestions to their clients for changes to protect their interests.
Home buying and selling are major financial transactions, often the largest of a person’s life. As it is to be and has been someone’s home, the process is also an emotional one. The attorney review period allows a dispassionate professional to provide advice.
It is typical to provide that attorneys for the buyer and seller will have five business days to review the contract. In one instance, the seller had crossed out a soil boring clause from a standard contract. The buyers loved the property. The buyers' attorney insisted the clause be reinstated. It was discovered the property sat atop a USEPA contamination plume. The contract was voided and the buyer saved considerable grief.
The many possible contingencies make a real estate contract different than most contracts. Most contracts are set at the time of offer and acceptance. They are a "done deal" and both parties are liable to fulfill their obligations. If either party attempts to renegotiate any point, the other party can simply say no.
Contingencies Allow New Negotiation
Real estate contracts have clauses which allow renegotiation in limited areas. A real estate contract may require a buyer to get a home inspection completed in seven days and allow the buyer three days to review the inspection and report any problems to the seller. If no problems are reported, that contingency automatically disappears.
If the inspection is performed within the required time frame, and shows a cracked tile in the corner by the fireplace, the buyer reports that problem to the seller. The buyer and seller renegotiate that aspect of the deal. It's a legal contingency. It is subject to renegotiation. The seller decides to replace or not replace the tile. The buyer and seller decide whether it is worth losing the deal over a broken tile or not. The problem could be a faulty roof, requiring more serious thought.
Buyer Protection Clauses
Contingencies are escape hatches in a real estate contract. They can end the deal without penalty if certain conditions are not met. Typical examples are:
- Buyer ability to get a loan at market interest with 10% down
- Inspections of major systems and structures.
- Projected renovation costs.
- Environmental hazards.
- Water, soil and septic issues.
- Title, taxes and liens.
- Review of Condominium Declarations and Bylaws.
Contingencies are a normal part of a real estate contract, and all are negotiable. An experienced attorney can provide great protection for a buyer. This is the importance of the attorney review contingency. Appropriate use of contingencies can be buyer-protection clauses (sometimes called "jump out" contingencies) and always considered in any real estate purchase agreements.
David J. Shestokas - Mr. Shestokas is a former prosecutor & writes on the Constitution & legal issues for the Save America Foundation & Suite 101.
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