UNDERSTANDING REAL ESTATE CONTRACT CONTINGENCIES

A standard practice to protect both buyers and sellers.

If there is one overarching thing to be learned from the COVID-19 pandemic, it is this: Have a contingency plan for everything.

The future is always uncertain, but before the pandemic, the future was often taken for granted. Now, everyone is finally starting to accept that the future is the great unknown and that even the best laid plans may fail to come to fruition.

As such, having contingencies is going to be as much of a part of our everyday lives as having three square meals, or seeing how-to dance videos on TikTok.

That will be no different when it comes to buying or selling a home.

For as long as real estate transactions have taken place, buyers and sellers have had contingencies negotiated into the contract for the sale of a property.

This is done to mitigate risk and is a standard practice. A seller may want a contingency built into the contract that their obligation to sell is only conditional upon their ability to find and purchase another home.

Meanwhile, buyers often make their purchases dependent on positive inspection reports or put a financing contingency clause in the contract if they are, in fact, financing a portion of the purchase price.

These contingencies are put in place to protect a buyer’s and/or seller’s interest in a transaction and provides an “opt-out” from finalizing that transaction at a settlement if the contingency was not met or waived.

During the hot periods of the recent real estate market, contingency clauses were less commonly written into contracts to make an offer more attractive to the sellers. Now that the market has shifted, contingency protections are once again a common part of the negotiations.

Buyers especially have to be careful with their contingencies, as too many could cause their offer to come off as less attractive to a seller. When markets are competitive, too many contingencies can cost you a chance at buying your desired home.

Also, while contingencies are often clear and concise, they can still be confusing.

Take, for example, the financing clause of the Greater Louisville Association of Realtors Residential Sales Contract, which requires price and terms to be spelled out. If financing is part of the payment of purchase price, the type of loan, amortization period, and annual interest rate must be spelled out. The Contract states:

If financing (other than an equity line) is involved, this Contract is contingent upon Buyer qualifying for a loan with the above financing terms and conditions, or better.

If Buyer has acted in good faith and does not qualify for the loan, Buyer may void the Contract and receive Earnest Money Deposit in refund. The acquisition by Buyer of earnest money deposit, cash, equity line, gift, and/or other source of funds noted (above) is not a contingency.

Buyer must apply for said loan within ____ days. Failure to apply for loan shall constitute a breach of this Contract, in which case Seller may either a) grant a written extension of time; b) void the Contract and retain Earnest Money Deposit as liquidated damages; or c) pursue a claim for damages as a result of the breach. Any change in financing terms of Lender must not adversely affect the Seller’s proceeds of the closing date. Seller shall be informed of the progress of the loan, including any change to the above financing terms or selected Lender.

A seller should be understanding of the buyer’s need for time, but at the same time not allow for too much time to lapse for the sale.

On the other hand, buyers need to consider their earnest money deposit and the risk attached to it. Obviously the larger the deposit, the better the offer is, but then the buyer has to meet the financing deadlines.

Buyers should work with potential lenders in advance of making an offer for a property to guarantee the deadlines get met and the eventual deposit isn’t at high-risk of being lost. The GLAR Contract includes a line for Lender Contact Information to be written in.

Getting a pre-approval from a mortgage lender is better for a buyer than just being pre-qualified. Garnering a pre-approval letter from a lender to be included in a purchasing offer certainly strengthens the offer.

Contingencies are designed to help both buyers and sellers, and are part of real estate contract negotiations to protect clients on both sides of the deal.

Both buyers and sellers should understand the financing process, how contract contingencies work, and what each other’s rights are within the language of the contract.. This will make for a smoother transaction between both parties and, at the same time, mitigate the risk of a deal falling through and dealing with the ramifications that come when that happens.

Source: ANTHONY SANFILIPPO, August 2020 National Association of REALTORS