The definition of contingency is
a future event or circumstance which is possible but cannot be predicted with certainty.* When we include a contingency addendum in a real estate transaction, we're identifying a just-in-case scenario, an IF/THEN. Anything that is agreed by both buyer and seller can be included in the purchase contract as a contingency. Both buyer and seller can request that a contingency be added to the contract. The reason to include this addendum in a purchase contract is so that in the event that the contingency does happen, the sale can be cancelled and buyers will be able to get all of their deposit money back without penalty. Here are some common examples:
Home Sale Contingency
IF I can sell my home, THEN I'll buy your home. This is a request by the buyer. The way this normally appears in a contract is the opposite: IF I don't sell my home by X date, THEN I can't buy your home and I'll want to get all of my deposit money back.
Home Purchase Contingency
IF I can find a house to buy, THEN I'll sell you my house. This is something that the seller would include. It is normally worded similar to the above: IF I can't find a house by X date, THEN I'll cancel this contract that I have with you. You can get your money back and I'll just stay in this house and you'll have to buy a different house.
Home Inspection Contingency
There should always be a dollar amount and an expiration date associated with a home inspection contingency. Let’s say you want a $5,000 home inspection contingency. That means that if you have a home inspection and find more than $5,000 worth of problems, you can cancel the sale and get back all of your deposit money – as long as you notify the seller or seller’s agent in writing before the expiration date that was in the initial offer.
There is often confusion about how this works. It doesn’t mean that if the buyer has a $5000 home inspection contingency and finds a problem that will cost $1,000 to fix, that they can’t ask the seller to fix it or give them a credit. It does mean that if the seller says no, they won't fix or credit the requested item, the buyer can not cancel the sale and get back their deposit. The buyer can ask for whatever they want and the seller can be a nice person and say yes to reasonable requests or not. Unless the contingency amount is met, the contingency addendum doesn't kick in. Learn more about the home inspection process.
IF the home doesn't appraise for the agreed purchase price, THEN the buyer has the option to cancel the transaction. In this case, the seller would have the option of lowering the purchase price to align with the appraised value. Learn more about the appraisal process.
Normally, unless the buyer is using their own cash to buy the home, there will be a financing contingency. It will say something like: IF the buyer doesn't get a loan for this amount by this date, THEN they will cancel the sale and get all of their deposit money back. There should be dates both for the final approval by the lender and for the submission of all documents. If the buyer never applies for the loan or doesn't get the requested paperwork to the lender by the agreed date, then they would forfeit their financing contingency and not be able to get back their deposit.
Clear Title Contingency
Before you take ownership of the home, your attorney or title company should do a title search. They will look back through the past 50 years to see if any lender, creditor, tradesperson, etc has recorded a debt against the house that has not yet been paid. Most standard contracts include a paragraph that the house must have a clear title, meaning that all liens have been paid off before the buyer takes possession of the house. There is normally a 30-day or other predefined window of time for the seller to take steps to clear the title if a problem is discovered.
These are just the most common contingencies that are found on home purchase contracts but, as mentioned above, anything that both buyer and seller agree to could be included in the contract. Two important things to note: contingencies normally state that the contract will be canceled if the contingency happens. If you don't think you'll actually want to cancel the sale, you don't need to make it a contingency. Also, be aware that the more contingencies, the weaker the offer. If you are in a competitive situation and expect that the house will have multiple offers, only include contingencies that are true deal breakers for you.
As always, I hope that you've found this helpful. If you have any question, drop me a note.