Contingency Clauses and Real Estate Contracts?


In the wide world of real estate, contracts are the glue that holds everything together. It keeps people honest, and it protects everyone's investments in the deal. The contracts can be pretty straightforward, however, there are some things you can add to the contract to give yourself more protection as either the buyer or the seller. These are called contingencies. Contingencies are little additions to your contract that allow you to back out if something comes up that doesn't meet your standards. They are super handy if you find something seriously wrong with the house or the neighborhood you plan to move into. Here are a few of the most common contingency clauses that you might see on a contract, and a few not so common ones as well. Be sure to consult your real estate agent before you add or subtract anything from your contracts, however. There may be things that have to be worded a specific way to be legal or legally binding.

Financing Contingency Clause

Financing your home purchase can be quite the adventure. Hopefully you will already be preapproved for a loan, so all you will need to do is finalize everything. However, even if you are preapproved, the bank may not think the house is a good investment or it could have some other reason for backing out. Whatever it may be, you don't want to be on the wrong end of the money when your contract is about to close. So, a lot of people will have a financing contingency clause that allows you to back out of the contract if your financing doesn't come through.

Inspection Contingency Clause

After you have decided to buy a home, you will want to do an inspection. This inspection will tell you if all is well with the inner workings of the home. The inspector will look at things like the roof and the foundation along with checking for mold and other such problems. There have been many times where a home that seemed to be completely fine has been found to have a faulty roof or a cracked foundation. In this case, if you don't have an inspection contingency clause, you will be stuck with the home anyway even though it is damaged. In the inspection clause you could also make arrangements to negotiate repairs if there is something wrong and you still want to buy the home.

Home Sale Contingency Clause

This contingency clause is designed to protect you if you need to sell the home you are currently occupying before you can buy the new home. The clause will allow you to back out of the purchase of a home if you are having trouble selling the one you are currently in. This will save you lots of money as you won't be having to pay for two different mortgages for a while. Not to mention it will save your credit score since you won't have some much debt hanging over you.

Kick-Out Contingency Clause

A kick-out clause is one that is usually one that is geared towards the home seller. They use these in the case that the prospective buyer puts a home sale contingency clause into the contracts like we illustrated above. The kick-out clause is designed to let the home seller continue marketing the home for sale if the prospective buyer doesn't sell their current residence in a certain period of time. This allows the seller to be safe from long arduous waiting periods if the buyer's house doesn't sell.

Insurance Contingency Clause

Homeowners insurance is something that every homeowner should have, especially if you happen to live in an area that could get flooded, or has a high likelihood of fire. However, there are sometimes when an insurance company decides to not play ball and will deny homeowners insurance. If you can't get insurance, then you will have just bought a huge liability. If you take the time to get the insurance first, however, you will know whether you should go through with the deal.

Appraisal Contingency Clause

When you are serious about a home, and the inspection has come back clean, the next step is to send in an appraiser. He/ she will be able to come up with the most accurate amount that the home is worth. In some cases, the appraiser will come back and say that they home is the same value as what you are saying; sometimes he/ she may say it is worth more, and sometimes, it can even be less - that is when you will realize how much you will need an appraisal contingency clause in your contracts. This will allow you to renegotiate, or even back out entirely, from the purchase if the appraisal comes back and reveals the home isn't worth what you both thought it was.

HOA Contingency Clause

HOAs can be tricky things to deal with. They can make up rules and regulations that dictate a lot of what you can do to, inside of, and around your home without legally imposing on your rights. Sometimes, you can steer clear of neighborhoods with HOA rules that you don't agree with, but sometimes you just can't get your hands on their rule book quick enough. It would be terrible to find out, after purchasing what you thought was your dream home and then finding out that your HOA won't let you park your RV in front of your house for longer than two days. Or that you have to cut your grass to a certain height every week. Or some other regulation that doesn't sit well with you.

To avoid this, you can put an HOA contingency clause into your offer which allows you to back out if you find that the HOA does not fit with your vision. These contingency clauses are a bit harder to work with and should only be undertaken by your licensed real estate agent.

Termite, Radon, Lead Paint, etc. Contingency Clauses

These next clauses are pretty self-explanatory, but can be very location specific. If you live in an area where lead paint, radon, termites, or any other threat like that is imminent, you will want a clause that covers that. Essentially, it states that if termites, radon, lead paint, or whatever it is that you add to the clause, is found in the home, you don't have to buy the home or can negotiate repairs (depending on the scope of your contract).

So, these re the most common contingency clauses that you will find when doing real estate transactions. This is, again, for educational purposes and should not be considered as legal suggestions or advice. Talk to a licensed and qualified real estate professional, like an agent from the Hughes Group, for more information about utilizing these tools.

If you want to learn more about real estate, keep watching out blog for weekly uploads for more tips and tricks, as well as informational articles to help you beef up on your real estate vocabulary and knowledge.

The Hughes Group of Silvercreek Realty Group is also here to help people who are new to the Boise area. If you have just moved to the Treasure Valley and want to learn more about the Boise culture, real estate, or more, contact the Hughes Group today!