Contingency Clauses-Hedge Against Disaster


Who wouldn’t like to know what the future holds?  In my line of work, knowing the future would be helpful.  I’d like to know if mortgage rates will rise, if that renter will skip town, and if the foundation on this property will fall into a sinkhole.  But as a non-superhero type, I have to rely on more ordinary means.  One way to hedge against future distress when it comes to buying a property:  contingency clauses.

A contingency clause is part of the purchase agreement you, as a buyer, signs when submitting an offer to buy a home.  Contingency clauses are most often used under financial or appraisal terms.  A financial contingency is related to a buyer’s ability to secure a mortgage (financing terms) for the property.  If the financing falls through, and the buyer cannot meet the financial obligations, the seller agrees to release the buyer from the purchase agreement and refund the earnest money.  I have seen the seller be unrelenting and demand satisfaction on the contract.  This gets ugly fast, so I usually recommend  a quick and clean cancellation so the seller can move on to find a more suitable buyer.

An appraisal contingency is one based on a third party’s assessment of a property’s value.  If the list price is $200,000 and the independent appraisal comes in at $150,000, the buyer can break the contract with the appraisal contingency and back out.  Or in some cases, the buyer can use this to re-negotiate the purchase offer price.  In such a case,  the seller is usually wiling to lower their price in order to get the property sold.

Another version of a contingency that I’ve seen used is based on a third party home inspection.  Most common on older homes, the buyer is cautious in approaching a home because of it’s general condition.  They put in a contingency clause that allows them to cancel the contract if a major defect is found in the property, such as a crumbling foundation, asbestos, or lead paint. Such issues involve an expensive and often lengthy repair and many buyers shy away from such issues.

There is a catch however, with using contingency clauses.  Sellers who have a lot of interest in the property and see multiple offers tend to skip over the hassles involved with contingency clauses.  Using them in a multiple offer situation can stack the deck against the buyer.  A purchase agreement without any contingencies makes for a stronger offer than one with several contingency clauses in place.

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