Contingencies are stipulations that must be met before the sale of a real estate property is legally completed. When a contingency is met, it is “removed” or “waived.” In order to remove a contingency, the buyer must inform the escrow holder in writing that the conditions of the contingency have been met. If the contingency cannot be fulfilled by one party, in good faith, then the deal may be dissolved without breach or penalty.
According to the National Association of Realtors (NAR) survey, 76% of real estate contracts contained contingencies in 2020, and minor issues often arise that may delay closing; however, serious issues may cause a long-negotiated deal to fall apart at the last minute, wasting time and money. No matter what side of the deal you are on, it is important to know what common contingencies are and what to do if problems arise.
To save yourself time and money, it is important to educate yourself, know what you can do yourself, and when it’s time to talk to a real estate attorney. Before entering into a contract, ensure that the conditions are clear to both parties, in writing, and the contract outlines specific deadlines. There are a number of possible contingencies, depending on the kind of real estate deal, but there are a few that are the most commonly implement and the most commonly disputed.
These are the 5 most common contingencies according to the 2020 NAR survey, and these statistics have remained relatively constant when compared with previous years:
Home inspection contingency: This contingency stipulates that the property must undergo a professional inspection. The buyer and seller can then negotiate repairs or the purchase price based on the inspection. In 2020, 58% of contracts contained this contingency (NAR 2020).
Financing or Mortgage contingency: This contingency stipulates a timeframe for the buyer to obtain financing for the property. In 2020, 47% of contracts contained this contingency (NAR 2020).
Appraisal contingency: The sale is agreed upon, but conditional upon the lender’s appraisal. If the lender does not feel that the purchase price corresponds to the value of the property, the buyer will find him or herself without the financial backing to purchase the home, so this is an important contingency protecting the investor. In 2020, 46% of contracts contained this contingency (NAR 2020).
Title contingency: In the case of a problem with the property’s title, such as a prior lien on the property, the buyer is able to back out of the purchase without penalty. In 2020, 12% of contracts contained this contingency (NAR 2020).
Home sale contingency: Often, a buyer must sell their existing home in order to purchase a new property, so this contingency stipulates that the purchase is contingent on the sale of the buyer’s home. From the seller’s perspective, however, this contingency creates many potential delays and complications, so sellers will avoid this contingency when possible. However, in 2020, 6% of contracts in 2020 included this contingency (NAR 2020).
A breach of the purchase contract means that either the buyer or seller has failed to meet the conditions of a contingency without a valid legal reason. A seller cannot simply decide that he or she no longer wants to sell the house after a contract has been entered into. For example, if the seller fails to find a new home by the move-out deadline, this is not a valid reason for delaying the sale, although a buyer might want to work with the seller in this circumstance within reason.
If the seller of the house is in breach of contract, the buyer can file a suit for specific performance: this suit asks the court to compel the seller to complete the sale of the property as agreed upon in the contract, and such a suit may include damages based on expenses incurred by the buyer.
If the buyer of the house is in breach of contract, the seller may ask for mediation or file a suit for damages.
See our blog entry on types of damages for more information.
Although only 9% of contracts went into settlement in 2020, issues do commonly arise. The number one cause of a terminated contract in 2020 was the buyer’s loss of employment (28%), followed closely by a problem obtaining the necessary financing for the purchase (21%), which is also the primary cause of delayed settlement. Home inspection issues are also a common cause of delay (10%) or termination (17%), as are appraisal issues—18% of delays and 6% of terminations (NAR 2020). Being aware of such contingencies and knowing when to implement them in a real estate purchase contract are key for both buyers and sellers to protect themselves, and can ensure that the escrow process moves much more smoothly.