What are contingencies on real estate contracts and how do you deal with them? What do they mean? What are the course of actions that I would need to take as a buyer? As a seller?
There are many contingencies built into real estate contracts. They are there to protect the buyer and sellers, and to ensure that certain criteria is met prior to finalizing or closing on a property. Depending on the type of contract, whether you are the buyer or the seller, the contingency has slightly different look and feel, but in the end the condition needs to be met to the satisfaction of all parties (sellers, buyers,lenders) for the contingency to be met and released.
So what is the risk of not meeting the contingency? As a buyer, your Earnest Money Deposit (EMD) is at risk, as the seller can put a claim on the funds due to the buyer missing deadlines and not meeting the contingencies on a timely basis. As a buyer, as long as you meet the timelines, communicate with the seller, and follow protocol if you need to ask for a Release & Cancellation of Contract, you can claim your EMD and get it returned to you. It is incumbent on your Real Estate Agent to manage and educate you, on a timely basis, on the conditions, actions, and timelines. We are the Real Estate Pros for a reason!! We guide you through the process and make sure we take care of you, protect you and communicate with you, buyer and or seller.
Some of the most common contingencies in contracts are spelled out below.
- Right to Inspect and Right to Cancel – The buyer has the right to inspect a property and cancel the contract if they don’t feel that the property in its current condition is a good fit for them. This contingency is released if both parties agree on repairs items or cost concessions. It can also release the buyer from the contract if both parties don’t come to an agreement on how to proceed.
- Appraisal Contingency – Whether its a VA, FHA or Conventional Loan the lender will require an appraisal to be conducted by a licensed appraiser. This will ensure that the value of them meets or exceeds the purchase price. If the home “appraises at or above value” then the condition is met and the contingency is released. If the value is below the purchase price, then the buyer and seller can re-negotiate the terms of the loan to meet the contingency requirements.
- Title Contingency – The Seller has to be able to convey a clean and transferable title to the seller. Sometimes issues like, liens, unpaid utility bills, claims by others on the property, open or expired permits can cause issues with the title. The seller has to “clear” the items for the contingency to be met and released.
- Financing Contingency – The buyer has to be able to get approved for a loan or mortgage within a specific time for this contingency to be met and released. If the buyer can not get Final approval, within the time frame, then the buyer can ask for cancellation and release of contract and get their Earnest Money Deposit (EMD) returned. But buyer beware, you have to stay within the time limits, if you exceed the time to get Loan Approval without communicating with the seller and extending the time contingency, you put your EMD at risk.
There are other contingencies that are important. Ask your Real Estate Pros Agent about contracts and contingencies, and what we do to help and guide you. Ask them to explain them, and we will educate you.
Have a great day and stay safe and healthy. Take care of yourselves and others.
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