Ask Brian: What are Contingency Clauses?



Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question. Rebecca from Hillsgrove, RI asks: Hello Brian, My home has been up for sale about 8 weeks. This week, I received my first offer and it was for my full asking price. My agent says I should accept. My concern is that there are 5 contingency clauses in the purchase offer. I’m not even sure exactly how these clauses work but my agent tells me that the sale can’t be completed until all of the conditions have been met. The clauses are an inspection contingency, a financing contingency, the appraisal, a title contingency, and a home sale contingency.From what I understand, there isn’t much I can do personally to satisfy these clauses. Do you think I should accept this full price offer?

Answer. Hi Rebecca. The short answer is those are all normal contingencies for the most part. The devil is always in the details. In general, you want to be sure an acceptable time limit applies to each contingency. Your agent should know what is normal and reasonable for your area. The buyer is asking you for an exclusive right with their commitment to purchase the house once these conditions are met. This is also commonly known as a “pending sale.” Something your agent should make clear to the buyer is that you’ll be reviewing backup offers (even for less than full price). Backup offers strengthen your ability to enforce time limits on the contingencies. Let’s deal briefly with each contingency.

Inspection contingencies are normal. There are at least two things that you want to do here. First, your seller’s disclosure should have been accurate. Making a full disclosure reduces the chances that a professional inspection will turn up surprises. The buyer’s offer needs to be clear that the buyer is paying for the inspection. The contingency should also be clear about when the inspection report must be completed as well as when the buyer will respond following the inspection (accept, reject, or amend the purchase offer). Something else to keep in mind is a deadline for any additional expert or re-inspections.

The financing contingency should be mostly a formality. The buyer should already be pre-approved for a specific dollar value mortgage. But they do need to go through the underwriting process for final approval specific to your house. Again, you want a hard deadline for when this has to be completed so that you have a date when you are free to accept any backup offers you might receive. The financing contingency will be tied to the appraisal contingency.

Appraisal contingencies validate the buyer’s mortgage perimeters meet the fair market value of the home. You want firm dates for when the appraisal report has to be completed and when the lender has to approve the loan. If you chose to, you can always slide on these firm dates but having the dates limits the time the buyer has exclusive purchase rights. For instance, if the appraisal is below the sales price, you can extend the financing contingency date while you renegotiate the sales price. You can either lower your price or the buyer can find funds other than the mortgage to make up the difference between the sales price and the mortgage amount (or a combination of both).

A title contingency involves the legal documents of ownership and possibly liens against the title. Again, it should not be difficult to have a firm date when a title company or attorney must complete this review. As the seller, you should already be aware if there are any ownership or lien issues with the title. There shouldn’t be any surprises.

The home sale contingency is probably the trickiest for you to deal with. When a buyer has to sell their home in order to purchase yours, they ask for this contingency. But sellers don’t like these because sellers have no control and don’t know what might happen. The home sale contingency has seen limited use in this seller’s market the past several years. If your buyer doesn’t sell their current house, they aren’t going to buy your house. I suggest you have an in-depth conversation with your agent about insisting this contingency be removed from the current offer. If you decide to allow this contingency, make sure the time limit is weeks rather than months. Your strategy is for this contingency to expire before or at the time the other contingencies are completed. If you haven’t received any backup offers, you can always extend the home sale contingency.  

Rebecca, don’t consider this as legal advice. These are only common situations involving contingencies that many sellers and buyers deal with on a regular basis. You may need legal or professional advice specific to your situation.

Certainly, I’ve missed some important information about contingency clauses and probably left out some that people need to know about. Your comments and insights on the subject will be appreciated. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.

Comments

  1. It was extremely interesting for me to read the post. Thank you for it. I like such topics and everything that is connected to them.

    • Brian Kline says

      Hello Arif,
      Thank you. If you have a particular topic you’d like to read about, please send it to me.
      Thanks again,
      Brian Kline