What Is A Contingency Clause In Real Estate?

A contract of purchase and sale is a legally enforceable agreement that outlines the responsibilities of all parties to the transaction. A contingency is a “condition” included in a contract of purchase and sale for the benefit of the seller, the buyer, or both the seller and the buyer.

 

Contingencies become part of the contract. The buyer or seller must fulfill any contingencies in an offer before the offer moves towards completion. Conditions are for a set period of time. For example, the buyer may have a condition in the offer where they have 7 days for a home inspection.

 

If any contingency clauses are not fulfilled (e.g., the buyer couldn’t secure financing for the home purchase), the buyer can back out of the deal without any legal consequences. If all conditions are met, then either the buyer or seller would be in breach of contract if they backed out of the deal.

 

1. Appraisal Contingency

An appraisal contingency is common in offers where the buyer requires financing and needs an appraiser to estimate the home’s value so that the buyer can get a mortgage loan on the property. An appraisal contingency protects the home buyer.

 

2. Inspection Contingency

A home inspection contingency may be one of the most common contingencies. This is when a buyer wants a home inspection before removing their condition. It gives the buyer enough time to review a home inspection report with the inspector and can then choose if they want to go through with the purchase, back out of the contract, or negotiate repairs based on the findings.

 

3. Financing Contingency

This is when the buyer requires a mortgage or loan to purchase the property. A financing condition gives the buyer time to apply and obtain financing. Once the buyer has an accepted offer on a property, they’ll need to meet with their mortgage broker or bank to make sure they can get a loan to purchase the property before removing their financing condition. If you buy a home with all-cash, you wouldn’t need financing or an appraisal condition.

 

4. Home Insurance Contingency

Knowing that you can get home insurance on a property is important before removing the home insurance condition. Home insurance companies often allow you to move into the home but will give you a 30-60 day window where you’ll have to fix or repair any issues that limit your ability to get insurance.

 

Home insurance becomes even more important when you need a mortgage loan to purchase a property. You may not get a mortgage loan if you can’t get home insurance. Therefore, your ability to obtain home insurance shouldn’t be overlooked in the due diligence period.

 

5. Title Contingency

The property title shows who has legal ownership of the property. It also lists any encumbrances, restrictive covenants, easements, rights of way, or building schemes on the property.

 

It’s important to review the property title to ensure nothing is included in the title that will limit you from what you’re hoping to do with the property.

 

6. Property Disclosure Statement Contingency

The home seller(s) fills out the property disclosure statement. In BC, home sellers are required to fill out the property disclosure statement before listing their home on the MLS®.

 

7. Subject To Sale Of The Buyer’s Home

This condition isn’t as common, but it’s when a buyer has to sell their home before purchasing a new one. The buyer’s agent will have this condition in their offer. If the offer gets accepted, the home buyer will have a certain period where they’ll have to sell their home. If their current home doesn’t sell, the buyer doesn’t have to go through with the new home purchase.

 

How Long Is The Contingency Period?

There is no set contingency period, but usually, the condition period is between 7-10 days. It can be shorter or longer depending on the real estate market and the type of contingency. For instance, a subject-to-sale contingency is longer than subject to the title or property disclosure statement condition.

 

What’s The Difference Between Contingent Vs. Pending?

The property listed for sale changes to pending once the buyer or seller has removed all of their contingencies and the buyer has submitted their deposit. Or, the buyer submitted an offer with no conditions, and their deposit is in. A buyer’s deposit is held by the buyer’s agent’s real estate brokerage.

 

A property is contingent when there is a conditionally accepted offer on a home (the home is under contract), but there are conditions that must be met before the sale is pending. Pending is a step closer to the completion date.

 

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