As a home buyer, you’ll eventually reach a point where you have to make an offer on a house. The offer will be presented in the form of a purchase agreement, also known as a contract.
This is one of the most important documents you will encounter during the home buying process. So you need to understand everything that goes into it, and that includes contingencies.
Let’s start with the different parts of a standard purchase agreement. At a minimum, residential real estate contracts typically include the following items:
Today we will focus on the last item on this list. We will examine the different types of purchase agreement contingencies that can be added to a real estate contract, and why they are so important to you as a home buyer.
The dictionary defines a contingency as “a future event or circumstance that is possible but cannot be predicted with certainty.” That’s an accurate definition for home buying contingencies, as well.
When you include these items in a purchase contract, you are essentially giving yourself a way to back out of the contract if a certain event or circumstance occurs. For this reason, contingencies are sometimes referred to as “walkaway clauses.” They let you walk away from the deal, legally.
A real estate contingency is a condition that must be met in order for the deal to go through. It is a requirement for the completion of the sale.
Example: If there is a home inspection contingency written into the purchase agreement or sales contract, it allows the buyer to back out of the deal if the inspector finds serious problems with the house. In this common example, the sale is made contingent upon the buyer’s acceptance of the inspection results.
Here, the inspection is the “future event or circumstance that cannot be predicted with certainty,” as stated in the definition above.
There is no limit to how many purchase contingencies you can put into your sales contract / purchase agreement. These documents are mostly boilerplate and standardized. As a home buyer, you could attach as many real estate contingency items as you want. It might make the seller less inclined to accept your offer, which is something to consider. But it is your legal right to include them.
Here are some of the most common purchase contingencies home buyers include within their contracts:
Note: These are not the only contingencies that can be included within a real estate purchase agreement. But they are some of the most common inclusions.
Real estate contingencies can be a double-edged sword for home buyers. They give you a legal way to back out of a transaction, if some unforeseen event occurs. That’s a good thing.
But they could also make your offer less appealing to the seller, especially in a hot market where multiple offers are common. That’s the downside. Market awareness should be your guide.
Certain types of purchase contingencies are common and should not raise any red flags with sellers. The home inspection contingency is a good example, as is the mortgage financing clause. Most real estate contracts include these two provisions, and for good reason. They’re common sense. But the further you get away from these common contingencies, the more likely the seller is to object.
For instance, making the deal contingent upon the sale of your current home could work against you — especially in a seller’s market where the homeowner has other offers to consider.
We encourage buyers to take a “market-based” approach when using purchase agreement contingencies. Spend some time researching your local real estate market. Is there a lot of competition from other home buyers? Are houses selling fast with multiple offers, or are they “sitting” on the market for a long time? Understanding local market dynamics will help you determine which purchase agreement contingencies to include — and which to leave out.
Bottom line: When buying a home, it’s wise to make the contract contingent on certain conditions. This can help you avoid becoming “trapped” into buying a house you either don’t want or can’t afford. But you have to exercise good judgment when including these clauses in your purchase agreement. One contingency too many, and the seller might reject your offer.