Contingencies in a Real Estate Transaction

What Does Contingent Mean in Real Estate?

In a typical real estate transaction, there are Buyer and Seller contingencies. Contingencies are conditions that either the buyer or seller (or both) must meet for the sale transaction to go through. A residential real estate purchase agreement contains many types of contingency clauses. The contingency period (days) starts after the purchase agreement acceptance. In California – Standard contingency periods are 17 days.

For example: a buyer may place an offer on a home, but the offer is contingent on the buyer selling their current home first or contingent on obtaining a mortgage loan.
For the seller – the contingency may be that seller needs to find a replacement home before selling the current home. Or the seller may require a longer escrow period, or a lease back for a specific period of time before they can move into the new home. 

Does a Seller have to agree to contingencies from a buyer?

Sellers are not required to agree to contingencies. However, not allowing contingencies may reduce the likelihood of securing a buyer.  If the buyer is restricted from including contingencies with their purchase offer, they may be forced to move on and make an offer on another home.

Most Common Buyer Contingencies

Sale of current home or other home contingency
This contingency protects the buyer who may require the cash proceeds from the sale of their existing home or other property in order to be able to qualify tor a mortgage loan to purchase the new property.
With this clause – In the purchase agreement, the buyer will need to specify a deadline for which to sell their current property. If the buyer is unable to close escrow on the sale of his/her property in time to be able to close the new purchase transaction, the buyer can rescind the transaction.

Mortgage Loan Contingency
This contingency specifies that the buyer must obtain financing in order to purchase the home. If the buyer does not secure a mortgage loan by the contingency period, the buyer can rescind the transaction without penalty. The seller can then put their home back on the market and choose a different buyer.

Appraisal Contingency
This contingency safeguard the buyer by stipulating that the property must appraise at the purchase price (at minimum), or the buyer can rescind the transaction.
Otherwise, the buyer can either bring in cash to cover the difference between appraise value and purchase price or ask the seller if the purchase price can be reduced to the appraised value.

Title Contingency
This contingency allows the buyer the right to obtain a title search on the property. If there are any issues with the status of title, the items in question must be cleared by the seller in order to be able to transfer “clear title” and allow the transaction to close.

Home Inspection Contingency
This contingency allows the buyer to have the property professionally inspected. 
The home inspection helps ensure there are no major issues, such as a leaking roof, a faulty electrical system, plumbing issues or structural defects.
If the inspection reveals defects, the buyer can submit a request to the seller to either have the repairs done, give buyer credit towards closing costs, or to lower the purchase price. 
(In California, a seller is not required to respond to a buyer’s request for repairs).
If the seller elects does not agree to any of the buyer’s requests, the buyer can rescind the transaction.

Homeowners Insurance Contingency
This contingency allows the buyer to apply for and obtain homeowners insurance on the property.
If the buyer cannot obtain the necessary insurance, either party can rescind the transaction.
Depending on the property location, the lender may require additional insurance coverage such as: flood insurance. Or, if the property is located in a high hazard area such as: “very high fire hazard severity zone” or “a wildland area that may contain substantial forest fire risks and hazards”, then some insurance companies may not even insure the property. 

Additional Inspection Contingencies (not very common)
There are other potential inspections the buyer may request such as: Radon testing, well water testing, checking for mold, and testing for the presence of lead paint.