Definition
A contingency clause is a condition written into a real estate contract that must be met for the transaction to move forward. If the contingency is not fulfilled, the buyer or seller may have the right to cancel the contract without penalties. Contingencies protect both parties by ensuring that specific conditions—such as securing financing, passing a home inspection, or selling an existing home—are satisfied before closing.
Explanation
Contingencies are common in real estate contracts and are included to reduce risk for buyers and sellers. These clauses set conditions that must be met before the deal is finalized. If a contingency is not met, the buyer can typically walk away from the deal and get their earnest money deposit refunded.
The most common types of contingencies include:
- Financing Contingency – Allows the buyer to cancel if they cannot secure a mortgage.
- Home Inspection Contingency – Gives the buyer the right to back out or negotiate repairs if the home inspection reveals significant issues.
- Appraisal Contingency – Protects the buyer if the home does not appraise at or above the agreed price.
- Home Sale Contingency – Allows the buyer to cancel if they cannot sell their current home before closing.
- Title Contingency – Ensures that the home has a clear title before the buyer commits to the purchase.
While contingencies offer protection, sellers may be less likely to accept offers with too many conditions, especially in a competitive market. In hot real estate markets, buyers may choose to waive certain contingencies to make their offer more attractive, though this comes with risks.
Example
A buyer submits an offer on a home for $500,000, but the contract includes a financing contingency stating that they must obtain mortgage approval within 21 days. If they cannot secure financing within that timeframe, they can withdraw from the deal and receive their earnest money deposit back.