A contingency is a condition that must be met in order for a contract to be legally binding. In most cases, buyers set contingencies to protect them from having to perform on a contract if something doesn't work out as planned. The most common contingency is a mortgage contingency. Often contracts will allow the buyer to obtain a mortgage commitment by a set date in order to fulfill that condition. If the buyer is unable to obtain that commitment on time, then the contingency will protect the buyer from having an obligation to the seller. Other common contingencies include:
Inspection contingencies are added to contracts to protect the buyers from issues with the home that they have no professional experience with. For example, if there was a heating or air conditioning system that was in question on the property, the buyer would want to have a professional inspect it. If a problem is found, the buyer could cancel the contract or request the seller to make a repair. Sellers can offer a credit against the repair if they don't want to do the work or can cancel the contract and move on to another buyer.
Appraisals are prepared by professional third parties to estimate the value of the property. The appraiser determines the value of the home based on an examination of the property itself, as well as the sales of similar properties. The appraisal contingency is used when the buyer wants to make sure that the property is valued at the contract amount or more.
Title is a legal document showing that someone has a right to, and the ownership of, property. If there are any issues with the title, such as an ownership dispute or lien, a title contingency allows buyers to walk away if the problem cannot be resolved before closing.
Home sale contingency provides a period of time for the buyers to finalize the sale of their current property. This is rarely used because most sellers don't want to bet on the possible success of someone else selling their own home.
Right to assign contingency is especially useful for wholesale real estate investors, as it provides the option to back out if they are unable to assign the contract to another buyer in a timely manner. Another common term this contingency is associated with is flipping properties.
HOA (homeowners association) documents, including meeting minutes, if applicable are reviewed by the buyer's attorney. An important item to pay special attention to is the homeowners association (HOA) reserves. A deficiency in the reserves could be a red flag that the HOA is in financial trouble or the HOA dues might be in line for an increase. A contingency here would protect the buyer from having to move forward with a property that is poorly managed.
The idea behind contingencies is to protect the buyer from items that need to be investigated during the due diligence period. Even though disclosure of material facts pertaining to the property is the seller's responsibility, there may be conditions that the property owner is not aware of or arise during the sale.
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