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Four common contingency clauses in transactional real estate

On Behalf of | Jan 26, 2024 | Real Estate |

Buyers hold a certain power in real estate. One such power is the ability to include contingencies in a purchase contract. Understanding these contingency clauses not only provides a safety net but also increases their bargaining power in the transaction. In real estate, overlooking these contingencies can lead to many challenges, such as potential financial loss, unforeseen property issues or even legal complications that could turn a dream home into a costly nightmare.

Financial contingency

The financing contingency offers buyers a safety net when navigating the financing process. This clause states that the transaction depends on the buyer securing a mortgage or financing. If the buyer can’t get a loan within a certain time, they can decide not to buy the property without facing any penalties. In this scenario, they can even get back the earnest money deposit they initially put down.

Inspection contingency

An inspection contingency gives the buyer the right to have the property inspected within a certain period. It protects buyers from unforeseen property issues that could lead to expensive repairs down the line. During the inspection, if the buyer discovers issues with the property, they can revisit the terms of the contract. This can include renegotiating the purchase price or, in some cases, even withdrawing from the purchase without losing their deposit.

Appraisal contingency

This contingency clause is there to make sure the property’s price matches its true worth. An appraisal is when a separate professional calculates the property’s fair market value. If the appraisal shows the property is worth less than the purchase price, the buyer can try to lower the price or choose not to buy the property. Similar to other contingencies, they can do this and still get back their deposit.

Title contingency

This contingency ensures the seller really owns the property and can legally sell it. Any liens, encumbrances or claims can complicate a deal. So, this contingency acts as a safety net for the buyer. It ensures that the buyer won’t be stuck with a property with legal issues or debts tied to it. If unresolvable issues come up during a title search, it lets the buyer cancel the deal penalty-free.

While it’s possible to include these contingencies in a real estate transaction, navigating this process independently can be complex. So, buyers should consult a lawyer to guide them while keeping their best interests in mind.