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Understanding Common Contingencies in a Real Estate Contract

Understanding Common Contingencies in a Real Estate Contract

All of the paperwork that comes with buying or selling a home can be overwhelming. The process is so involved and you need to understand everything that you’re signing. One of the many elements of a real estate contract that’s important to pay attention to are contingencies, as they can have a significant impact on how the sale will proceed.

What is a Contingency?

A contingency is a condition or action that must be met for a real estate contract to become binding. Contingencies are agreed upon by the buyer and the seller and are included in the contract. Although agreed upon by both parties, most contingencies in a real estate contract benefit the buyer. They will allow the buyer to back out of the contract and recover their earnest money if the contingencies are not satisfied. 

Earnest money is a deposit made to the seller to express that they are serious about purchasing the house. This deposit holds the home while the buyer obtains financing and has a title search, property appraisal and various inspections completed. Earnest money typically accompanies a signed real estate contract or purchase agreement. It can also be submitted with the initial offer. These funds are held in an escrow account until closing. If all contingencies are met, the earnest money is applied to the buyer’s down payment and closing costs at settlement.

Common Contingencies

If the specific terms or conditions of any contingencies are not met, both parties have the option to back out. While there are potentially numerous contingencies, here are some of the most common ones included a real estate contract. 

Inspection – This type of contingency is meant for the buyer’s benefit. A home inspection will provide the buyer with a thorough assessment of the house they are considering. An inspection contingency can cover the home’s condition and it’s systems inside and out as well as any mold or termite damage. Once the home inspection is received the buyer can determine if any necessary repairs require that they renegotiate with the seller. If the seller is unreasonable or unwilling to renegotiate, the buyer can walk away from the sale.

Financing and Appraisal – While these are separate contingencies, they do go hand in hand. Financing contingencies are pretty much standard in a real estate contract. They provide the buyer with sufficient time to secure financing. If the buyer is unable to receive financing, they have the right to look for alternative sources or to back out of the sale.

A home appraisal is an unbiased determination of the fair market value of the home by a professionally-trained third party. It is usually one of the things required when applying for financing, as a mortgage will not be given for more than the fair market value. Appraisal contingencies ensure that the buyer is protected if the sale price doesn’t align with the value determined by the appraisal and the seller isn’t willing to renegotiate. 

Title – A home’s title is a legal document showing a record of its ownership, both past, and present. It also serves as a record of any liens and judgments against the property.  A title contingency allows for any issues that might arise to be cleared up before closing. If it is determined that the issues are unresolvable or the buyer is unwilling to take them on, they can terminate the real estate contract. 

Home Sale – This contingency comes into play if the buyer currently owns a home they are trying to sell. While it greatly benefits the buyer, it has become unpopular with sellers. In today’s market, it is only implemented under certain circumstances. It requires sellers to take their home off the market for a specific period of time with no guarantee the buyer will sell their home and follow through with the purchase. For this reason, sellers often pass on offer with a home sale contingency attached.

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Real Estate Contract Professionals

It’s important to team up with real estate professionals who can help you navigate the contingencies and all the other paperwork involved with buying or selling a house.

Choose an agent who has extensive experience with your location, the type of property you are selling and a proven sales record. If you’re selling real estate on LBI, consider working with the Freeman Group

Over the last 20 years, we have earned the well-deserved reputation as the premier real estate company on Long Beach Island. Our team has completed hundreds of successful transactions establishing as the most productive and result-driven realtors in Ocean County.  Whether you’re interested in buying, selling or investing in Jersey Shore real estate, contact us today.




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