Everything You Need to Know About Real Estate Contingencies

The stakes are high in a real estate transaction. If you’re the seller, you’re eager to complete the property transfer and get paid. And if you’re a buyer, you have your heart set on a dream home. 

But as hopeful as both parties may be, real estate transactions can’t happen overnight. They take time and consideration. The seller, the buyer, and their respective agents must ensure everyone gets a fair deal. For the buyer, that means receiving a property in the best shape possible—or getting a price break because of the home’s flaws. It also means closing at an amount the buyer can reasonably afford.

Contract contingencies protect buyers from ending up with a money pit needing serious repairs, an overvalued home, or a property their mortgage won’t cover. Here’s everything you need to know about real estate contingencies and how they impact a transaction. 

What is a contingency in real estate? 

Real estate contingencies are contract conditions stipulated by the buyer. These conditions must be met for the real estate transaction to be successful, If they’re not, the buyer can legally back out of the contract and the deal is off. 

Contingencies benefit buyers as they protect them from a potentially detrimental situation. Even if a buyer has agreed to purchase a home, contingencies give them a recourse for breaking the contract without losing money. 

If you’re a seller, you must understand how contingencies work as they can negatively impact your sale or earnings. Your real estate agent is an excellent source of information and can provide an in-depth explanation of this part of the transaction; they’ll also guide you through it in real-time.

Common contingencies in real estate contracts

Contingencies aim to save a buyer from an ill-fated real estate transaction, protecting their interests and investment. And there are several types of contingencies that work toward this goal. Here are a few. 

Home inspection contingency 

A home inspection contingency, or a due diligence contingency, stipulates that a home seller must have their property professionally assessed for damage before the real estate transaction can proceed. The buyer’s offer only stands if the inspection comes back clean. If the home presents flaws, the buyer can back out of the contract, insist that the seller make repairs, or negotiate down the purchase price. 

Financing contingency

Buyers often need a mortgage to complete a home purchase, which means they’re at the mercy of a lender. Should the lender not finance a mortgage amount sufficient enough to cover the property, the buyer won’t be able to proceed. A financing contingency (a.k.a. a mortgage contingency) protects a buyer from needing to fulfill a purchase agreement on a property they won’t be able to afford or getting sued by the seller for backing out. The buyer also recoups any earnest money (a good faith payment that demonstrates intent to purchase) they’ve already given.

Sale contingency

Suppose a buyer already has a property they must sell in order to purchase a new one. A sale contingency protects this buyer from fulfilling the purchase agreement on a new home until they offload their current one. The stipulation comes with a deadline by which the buyer must sell their current home so that the seller isn’t waiting indefinitely.

Appraisal contingency 

Lenders determine a mortgage amount based on the official appraised value of a home. If the appraisal comes in lower than the number the buyer offered to pay, the mortgage will not cover that agreed-upon amount. For example, if a buyer offered $600,000 for a property that’s appraised at $450,000, there’d be a $150,00 delta between the mortgageable amount and the buyer’s offer. An appraisal contingency protects the buyer from having to purchase a property at an inflated rate and without a mortgage that covers the entire value. The buyer can negotiate the price or back out entirely.

Title contingency 

Before a buyer and seller can close on a real estate transaction, a title search must be performed to ensure the property does not have a lien (collateral on a debt obligation) or any encumbrances that prevent it from being transferred to the buyer or used as intended. With a title contingency in place, a buyer can exit a contract on a home that isn’t able to be legally transferred or used and receive their earnest money back. 

What sellers must know about contingencies 

Home sale contingencies are excellent for protecting buyers’ interests and money. But if you’re a seller, contingencies might keep you up at night. What if your home inspection turns up massive issues or the appraisal comes in much lower than what you’d hoped to earn on the sale? You can rest easier by preparing yourself for the challenges contingencies pose in the following ways.

Get ahead of repairs 

Consider getting your home inspected before you put it on the market. This way, you’re aware of issues and can tackle repairs before a buyer asks you to. If certain repairs are out of reach due to limited finances or timelines, then you can adjust your expectations to a lower offer price. Or you can get financing, like a closing line of credit (CLoC) from Titus. It’ll cover repairs now, and you can pay back later, once you’ve made a high-value sale. 

Be patient with your timeframe

Contingencies can add steps to your timeline. For example, if you haven’t done a recent home inspection, you’ll need to build in time for this process if a buyer makes their offer contingent upon it. The good news is that the contract between you and the buyer stipulates timelines on the contingencies, so when the onus is on the buyer (i.e. when they have to secure financing for the home), you can feel confident the process won’t drag on forever, either. 

Negotiate

Sellers don’t have to accept contingencies, meaning that you can reject an offer that comes with these conditions. If you’re in a seller’s market (lots of potential buyers and few available properties) and believe you can quickly receive an offer with fewer or no contingencies, you might wait for that better opportunity.

Or, you can negotiate. The buyer you already have on the hook may be willing to revise their conditions if they fear you’ll walk. In a buyer’s market, however, you may have to keep the purchaser from backing out by accepting contingencies or negotiating on price. It’s wise to have your real estate agent help with these negotiations. Realtors aren’t emotionally attached to the outcomes and have expert knowledge of real estate dealings. 

Home sellers: Mitigate contingencies with financing from Titus

If your home is in tip-top shape when it hits the market, you can avoid contingencies and delays in your timeline. Sure, you might have to wait while the buyer secures adequate financing or while your agent checks other boxes, like reviewing the home’s title. But you won’t be stalled because you need to make repairs or renovations to your home.

Work with a Titus real estate agent and gain access to a zero-interest closing line of credit (CLoC) to fix known issues, make cosmetic upgrades, and even rent a place to live while contractors work on your home. You owe nothing out of pocket or upfront. You just need to partner with a Titus agent to access this unique perk. Learn how it works here.