What Is a Contingency?

A contingency is a clause in the contract that defines a condition or action that must be met for the sales contract to become binding. Both parties, the buyer and the seller, must agree to the terms and sign the sales contract, contingencies included, to become binding.

These added clauses enable you as the buyer to acquire property on your terms and provide a way out of the contract if things go south. However, since a real estate contract is binding, it is imperative for you to understand how they are used and how to remain competitive when making offers.

Common Contingencies

Contingencies are included to protect time and money, both for the seller and buyer. For the buyer, you are protecting your earnest money as you work through the timelines of due diligence. For the seller, you are protecting your time investment in the current buyer.

Below are common contingencies you can expect to see in a real estate contract.

Inspection Contingency

This gives the buyer the right to have the home inspected within a specified time period, usually 5-7 days. It protects the buyer, who can cancel the contract or negotiate repairs based on what is found in the professional inspection report. Usually you pay the seller for the time to get this done.

Appraisal Contingency

This protects the buyer and is used to ensure the property meets a minimum value. If the home does not appraise for minimum value and the appraisal was conducted within the timeline designated, the contract can be terminated. Oftentimes, this is linked closely with the financing contingency.

Financing Contingency

Only homebuyers who are obtaining lending make the contract contingent on obtaining a loan, sometimes refered to as the Third Party financing contingency. Depending on the type of loan, the lender might require certain property conditions or repairs to make the loan. Like the inspection contingency, you have a deadline to maintain.

Title Insurance Contingency

This protects the buyer by requiring that a title company be willing and ready to provide the buyer (and lender, if there is one) with a title insurance policy. The title insurance policy protects the buyer from the possibility that the current or previous sellers didn’t have free and clear ownership of the property.

Sale and Settlement Contingency

This contingency can work in two ways, as either a buyer or seller contingency.

As a buyer contingency, you are asking that the contract be contingent on your selling and settling another home within a specified time. Be prepared for the seller to evaluate your current home listing—is the home on the market, for how much, for how long, etc.—before they accept or counter this contingency.

One way the seller can handle this contingency is to counter with a “kick-out clause.” A “kick-out clause” allows the seller to continue to market the property while under contract with the current buyer. If they find a new buyer, the current buyer has a specified time limit to remove the current sale and settlement contingency or the seller can pursue the new contract

As you move through the diligence period, keep a checklist of your contingencies and timeline, and don’t get locked into the contract because you forgot to complete a task on time. It may seem like a ton of moving parts; however, with a dialed-in due diligence checklist, good inspector, and lender, you can take care of most diligence and contingency items in the first few days of an accepted offer.

How to Make a Strong Offer With Contingencies

When offering on a property in a hot market, you will want to lower the friction for a seller to say “yes” to your offer. But that does not mean you have to remove all contingencies to be competitive (nor should you!).

Here’s my best tip: Ask the seller what they are looking for in their ideal offer. Just pick up the phone (or have your Realtor do it) and ask. This will help eliminate the guesswork, open a dialogue between you and the seller, and help everyone move quickly through the offer process.

Not only that, but you will also make a great impression on the seller if you show you care and then deliver on it.

Here are some other tips to make a strong offer for a motivated seller.

Highest and Best Offer

If you are going to ask for the moon on contingencies and the property is worth it, think about coming in at your best offer immediately and letting the seller know that. I’m not suggesting to overpay and if you must have all contingencies in place, don’t mess around.

Amend the Inspection Contingency

A seller wants to know quickly if you are going to stay in the deal or not. Time is not their friend when they have holding costs on a property.

To be competitive, you can shorten up the inspection period to 3-5 days.

The key here is having an inspection team that can move quickly, too.

Remove the Sale and Settlement Contingency

As the buyer, you could remove this contingency altogether. Do this if only if you have the ability to qualify for the loan and hold the property with other obligations in place.

Be Flexible With the Seller on Other Terms

This goes back to asking the seller directly what they need. What is in it for them? Do they need more earnest money, longer close, shorter close, closing costs paid, a mover, a rent-back?

What will put their mind at ease and make their life easier? What will make your offer stand out?

Conclusion

Contingencies can protect you, your earnest money as the buyer, and your time as the seller, as you work through the due diligence progress. If you can clear contingencies swiftly, you will become known as a buyer who can close quickly.

So, use contingencies wisely to create a strong offer, fulfill your end of the purchase sales agreement on time, and reap the benefits of getting the home of your dreams.

Have you ever had to compete in a similar situation? What did you do?