Contingencies Explained

When your putting in an offer (or reviewing one), one of the most important AND most complicated aspects of the transaction is understanding the many contingencies that are often attached to offers.

Contingencies defined

Contingencies are possible exits from the contract that are built in to the contract to protect one of the parties – though almost always the buyers.  Often contingencies have expiration terms, meaning that they must be exercised or removed by a certain date.

Common Contingencies

  • Home Inspection – This is usually the first to expire, generally within 7-14 days. A home inspection should identify major structural and other issues with a property, and will identify areas where corrections may be required or requested.  If the sellers are unable or unwilling to make corrections, the buyers can cancel the transaction without losing their earnest money deposit.
  • Radon Inspection - This contingency is generally only used in places with known or suspected radon issues (Northern Virginia happens to be one of these places!).
  • Appraisal – The appraisal contingency protects the buyers from purchasing a house over market value.  Lenders will generally only lend up to the appraised value, meaning that an agreed price over the appraised value requires the buyers to being additional cash to close the deal.  If an appraisal is higher than the agreed price, there is no issue, but if it is lower, there may be.  If the buyers do not wish to proceed and the sellers won’t lower the price to the appraised value, the sellers can exit the transaction.
  • Financial – The financial contingency protects the buyer from inability to get proper financing for the transaction.  Given how crazy the mortgage lending world is (with all the changing rules and requirements), the financial contingency removes liability from the buyers for inability to attain financing.  If the buyers are able to get financing, and intentionally torpedo the financing to get out of the transaction, they can still lose their earnest money deposit – but if the lenders simply can’t make it happen, the buyers won’t be responsible, and will get their deposit back.
  • Sale of Home – The sale of home contingency helps buyers who are also selling their current home, and require that sale (or the proceeds associated with that sale) to make their purchase work.  This contingency ensures that if their current home does sell, or a contract on it falls through, then they can escape their purchase contract without penalty.  It makes sure that if you can’t afford both homes, you aren’t accidentally forced to buy the new one!
  • Settlement of Home – Very similar to the Sale of Home contingency, but different in that if the proceeds of the sale of your home is required for your settlement of the second home, you aren’t penalized by a delay in settlement of the first home.  While you (or the seller) may have the option to cancel the contract, you won’t lose your earnest money deposit because of a failure to settle on the home you are selling.

There are several other less common contingencies, but these are the most common contingencies!