Essentially, a contingency clause in a purchase offer gives parties the right to back out of the contract under certain circumstances that must be clearly understood and negotiated between the buyer and seller.

Failure to agree on these contingencies, the contract becomes null and void, and one party (most often the buyer) can back out without legal consequences. Conversely, if the contingencies are agreed upon and met the contract is legally enforceable, and a party would be in breach of contract if he or she decided to back out.

Here are some contingencies you might want to consider:

Inspection Contingencies

Inspection contingency is one of the commonest and an important contingency in a purchase offer. Its importance is to ensure that the house doesn’t have major deficiencies.

This contingency gives the buyer the opportunity to accept the house as it is, require the seller to make some repairs or be released from the contract. However, if there is a major defect the buyer cannot overlook.This contingency also allows buyers to send in experts such a general contractor, pest inspector to examine areas that are not visible to a lay man.

In addition, ensure to include this contingency when purchasing a house currently built. This would enable you to view the construction at certain points during construction to make sure the home is being built up to certain standard.

Financing Contingency

If a home buyer is getting assistance with purchasing a home through mortgage or another source of financing this condition would be necessary in his purchase offer. This contingency may place a time period between signing and closing to ensure that the buyer is able to secure the funding before the closing day in order to cover the cost of the purchase or terminate the contract.

Failure to include this usually results in a situation where the source of financing e.g. mortgages can “fall through” somewhere between the purchase agreement and the final closing. In such cases, the buyer would want a way out of the purchase contract.

This protects the buyer, who can back out of the contract in the event they are unable to secure financing from a bank, mortgage broker, or another type of lending.

Home Appraisal Contingency

Mortgage lenders use home appraisals to make sure the property being purchased is worth the amount the buyer has agreed to pay (at least). In some cases, the property will appraise for less than the purchase price.

A home appraisal contingency gives you a chance to renegotiate the purchase price to reflect the appraisal, or to back out of the deal entirely. Also, an appraisal contingency may include terms that permit the buyer to proceed with the purchase even if the appraisal is below the specified amount

Title Contingency

Generally, you want to purchase a clear or unencumbered title to a property. To achieve this, proper due diligence and conduct a title search to know if the property is clear from lien, legal disputes and other problems is essential for every home buyer.

Some title issues may be resolved between the purchase agreement and final closing while others remain unresolved. In situations where the issues are unresolved, the title contingency enables the buyer to pull out of the contract if the seller cannot prove he has a valid and legal title free from any form of encumbrances.

Home Sale Contingency

This provision makes the sale contingent upon the successful sale of the buyer’s current house or gives the buyer a specific amount of time to settle their existing home in order to finance the new one. The contingency protects the buyer if an existing home doesn’t sell for at least the asking price, the buyer can back out of the contract without legal consequences.

Although this contingency is usually difficult on the seller, he can protect himself by retaining the right to cancel the contract if the buyer’s home is not sold within the specified number. This helps the seller not to pass up on another offer while waiting for this contingency.

Bottom Line

When buying a home, it’s wise to make the contract contingent on certain conditions. This can help you avoid becoming “trapped” into buying a house you either don’t want or can’t afford. But you must exercise good judgment when including these clauses in your purchase agreement.

It is also important to read and understand your contract, paying attention to all specified dates and deadlines. Because time is of the essence, one day (and one missed deadline) can have a negative—and costly—effect on your real estate transaction.

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