Contingent Real Estate-The 5 Big Real Estate Contingencies

What are real estate contingencies

What are Real Estate Contingencies?

Simply put contingent means depending upon or waiting for something to happen. In a real estate transaction, contingencies are conditions included in the purchase agreement that relate to a real estate transaction. These conditions need to be met, normally by a particular date in order for the transaction to proceed toward closing.

A real estate contingency can range from something as simple as wanting to make sure the home buyer is okay with the covenants for a particular neighborhood or as significant as needing to sell a home before closing on another.

The purpose of a contingency is usually to allow the buyer to perform any due diligence or discovery on the property. If there are issues with the property, the contingencies allow them to get out of the contract without penalty.

Because of this, the significance of the contingency clause doesn’t really matter, the purpose of a contingency is to allow the buyer to get out of a contract without losing their earnest money deposit.

These types of contingencies are included in the buyer’s offer and the seller would agree to them up front. Depending on the type of real estate market, buyers market versus seller’s market, contingencies may come and go. In other words during a strong seller’s market home buyers will have few contingencies because houses are hard to find, while In a strong buyer’s market we see lots of contingencies because buyers are rare and sellers are anxious to sell.

What About Contingent Listings?

A contingent listing is really just a home sale contingency, this is different than most contract contingencies because it says that the seller will accept the offer contingent upon the buyer selling their current home, this is really called a contingent offer.

In some real estate markets we see this type of contingency work but it is rare. The buyer is essentially asking the seller to take their home off of the market while the buyer tries to sell their property. Once a home is under contract, the status in the multiple Listing Service changes, usually to pending status. This means most buyers won’t consider looking at the property.

When a seller does want to entertain a contingency contract, it’s important that the sellers listing agent get into the multiple listing service and take a look at the real estate listing for the buyers contingent house. They need to make sure the contingent home is priced well and in a great area.

Many times in this scenario, the seller will continue to market their home to other prospective buyers in hopes of finding another potential buyer and activating a kick-out clause. A kick-out clause says to the current buyer “you have 24 or 48 hours to remove your contingent status or we’re going to sell this house to the new buyer”.
Home sale contingencies are seldom accepted and fall outside of the scope of the type of contingencies related to most real estate contracts.

Contract Contingencies

Contingencies must be written into the purchase agreement and the seller must agree to them upfront in order for them to be binding. Each contingency should be assigned a contingency period deadline in the Contract to Buy and Sell, these are usually decided by your real estate agent. Contingencies may be accepted by formal acknowledgment, but acceptance is also assumed when no objection to a given contingency is noted prior to its deadline. Don’t worry if that sounds confusing; we’ll go over several specific examples together in this article.

Just remember: the contingencies listed in your Contract to Buy and Sell are conditions that must be met. If a contingency is not met, your deal cannot close! In many cases, the deal may “fall out” at which point the seller could choose to move on to a backup offer if there is one in place. That’s why it’s so important to understand common types of real estate contingencies and the requirements of each.

5 Types of Real Estate Contingencies

Any number of contingencies can be written into a real estate contract (as every transaction is unique). But there are five types of common contingencies which apply to most real estate deals:

  1. Title

  2. HOA

  3. Inspection

  4. Financing contingency or loan contingency

  5. Final Walk

1. Title Contingency

The main purpose of the title contingency is to confirm that the buyer will get a “clear title” to the property upon close of escrow. The clear title just means that there are no other liens or claims against the owner of the property. Buyers want to be assured when they purchase a home that no one else can approach them after the deal closes, claiming to own a share (or all!) of the property.

A title company will be hired to research the property’s title (the ownership rights). A good title company will confirm that the seller actually has the right to sell the property. So the title company is looking for any “clouds on title” (any items which could prevent the seller from having complete rights to sell the property).

They also research any issues which could prevent the buyer from “quiet enjoyment” of the property (legalese for living in peace on the property without interruption by claimants).

A title search and report by your title company typically includes the following:

  • Any pending litigation. Bankruptcy filing, divorce proceedings, and lawsuits could all affect the seller’s ability to legally sell the property

  • Any liens on the property. Liens are debts against the property which must be paid prior to the sale. Tax liens for unpaid taxes and mechanic’s liens for unpaid home repairs and improvements are the most common.

  • Any easements and/or encroachments. Easements are authorized rights of others to access a portion of your land for a specific purpose. For example, you might have a utility easement for government employees to access electrical meters on your property. Encroachments are the unauthorized use of any piece of your land by another. This could be a neighbor’s overgrown tree extending into your yard or their fence crossing the property line into your property.

  • Any Improvement Location Certificate (ILC) requirements: ILC’s are informal geographic reports to confirm that the structure and any other improvements on the property (like sheds, fences, etc.) are located within the boundaries of the property lines. ILC’s also show easements and any encroachments. In many cases, they are accepted in lieu of a formal geographic survey.

  • The status of property taxes. Buyers need to know if sellers are delinquent on their property tax bill.

The buyer needs to understand the status of the property’s title and agree to the covenants in the title report. If the buyer objects to any covenant, or if the title company discovers a cloud on the title, the seller has the right to cure. Clouds on title are fairly common and often easily cured by the title company and the seller.

If the title issue can be cured, the contract is still enforceable, and the deal can proceed as planned.

In the unlikely event that the seller cannot cure the title issue, the property becomes “uninsurable” for the title company. This means a lender will not finance the purchase, and the property will be extremely difficult to resell. For this reason, the buyer of a home with an incurable cloud on title has the option to terminate the contract. In this case, the buyer would be entitled to a full return of their earnest money.

2. Homeowners’ Association (HOA) Contingency

The purpose of a Homeowners’ Association (HOA) Contingency is to make sure buyers are aware of any HOA the property belongs to. HOAs are private organizations that manage planned real estate developments. If your home is located in an HOA area, membership is mandatory; you cannot opt out of an HOA, so you need to understand your HOA and its operations.

HOA Dues

The HOA collects dues from all homeowners with property in the development to pay for maintenance of the development. This includes common areas like private streets and landscaping, as well as community amenities like pools, clubhouses, and security services. Some HOA fees may even include some utilities like sewer and trash.

While some HOA fees are delegated to the upkeep of common areas, other charges and fees are applied when a homeowner is consistently in violation of the rules, and covenants.

Buyers must be aware of the amount of the HOA dues, which can range widely. Suburban developments without amenities may only charge $25 per month to fund private road maintenance. Urban condominium communities with full amenities like sauna, concierge, and fitness centers may charge over $1,000 each month! Many Colorado Springs area homes do not belong to HOA’s, but those that do typically pay between $200 and $300 per month in HOA dues.

HOA Bylaws, Conditions, Covenants, and Restrictions

HOA’s also require homeowners’ compliance with HOA bylaws. Buyers need to understand the conditions, covenants, and restrictions (CC&R’s) of the HOA. Some common CC&R’s include:

  • Noise restrictions

  • Parking restrictions

  • Exterior property upgrade restrictions (for example, many HOA’s have similar-looking homes and won’t allow homeowners to change the home’s aesthetic)

It’s important to understand the CC&R’s for your potential HOA because failure to comply could ultimately result in the HOA placing a lien against your home, which as discussed previously, could affect your ability to sell the home in the future. Often times overly restrictive covenants are unenforceable. This means that, although they are written, and recorded, the HOA cannot enforce them.

Finally, buyers should research any special assessments levied by the HOA. Special assessments are a way to raise money for unexpected expenses. Well-managed HOA’s will reserve a portion of the dues for large projects, like a new roof or new road, in a reserve fund. However, the reserve may not cover the complete expense, and the HOA can levy a special assessment to collect the remainder from the homeowners.

Special assessments are also common in emergency situations like floods, fires, or tornados, where the insurance cannot cover the full cost of restoring the community.

Buyers can review all HOA documents, bylaws, and CC&R’s during escrow. If the buyer chooses to object to any terms of the HOA, they must do so before the HOA contingency deadline.

3. Inspection Contingency

The purpose of the home inspection contingency is to allow buyers to inspect the property during escrow. And to make sure buyers are satisfied with the condition of the property prior to closing.

We recommend that every buyer take advantage of this opportunity by hiring a professional home inspector to physically inspect the property and report on its condition and any visible issues with the structure and systems, even on a new home.

You can research local home inspectors online to find an inspector, or you can ask your REALTOR® for a referral to a professional, certified inspector. If you are choosing an inspector on your own, make sure he or she is certified by ASHI (American Society of Home Inspectors) to ensure a quality home inspection.

What’s included in a standard home inspection?

It’s important to note that home inspectors can only inspect what is visible. They will not open walls or ceilings or dig below ground to search for additional potential issues.

A typical home inspection includes a physical evaluation of the following:

  • General integrity of the structure (any sagging or bowing of the frame)

  • Exterior

  • Roof

  • Electrical system

  • Heating and cooling systems

  • Interior plumbing (this does not extend to the piping leading away from the home)

  • Appliances

  • Attic, basement, and garage areas

  • Grounds (driveway, patio, etc.)

  • Any potential safety issues

We recommend that buyers attend the inspection. This gives them a chance to get to know the property and to learn about the home directly from the home inspector. It’s also a great opportunity to ask questions of the inspector regarding the condition of the home.

Warning to buyers: your home inspection will report every little issue (or even potential issue!) uncovered by your inspector. Don’t panic! Many of these items are documented simply for the buyer’s information. They are the things we all live with like cracked sidewalks, staircases without handrails, or windows that stick when you open them. Take a deep breath before reviewing your inspection report, and know that not every item needs to be addressed. The inspector just wants to make sure you understand what you’re buying.

Some items may be serious and may require a remedy before the buyer is willing to release the inspection contingency and close the deal.

Some items may require an additional inspection. For example, if the home inspector notices electrical outages in the garage, they may recommend that a licensed electrician thoroughly inspect the electrical system.

Many items will simply be noted to bring them to the attention of the buyers and won’t require any action.

Your REALTOR® can help you navigate through the inspection, having seen dozens or even hundreds of them! Your REALTOR® can help you decide which items are serious, which items may need additional inspection, and which are just noted for your information.

What’s not included in a standard home inspection?

Standard home inspections do not include:

But if you’re concerned about any of these potential issues, you have the option to hire specialists to assess and report on these specific items.

Inspection Objection

Once the inspection report has been reviewed by the buyer, their REALTOR® can draft the Inspection Objection. The Inspection Objection lists any items from the inspection that the buyer wants to be corrected before the deal closes. It’s also common for buyers to request a reduction to the agreed-upon purchase price so they can afford to correct the issue(s) themselves after closing, instead of asking the sellers to correct the issue.

Inspection Objections often start a whole new round of negotiations. Buyers typically expect the seller to cure some of the issues brought to light in the inspection report. And sellers counter the buyers’ request with an offer to cure some, but not all, of the issues noted in the original Inspection Objection. As with most negotiations, it’s best to enter the discussion with an attitude of compromise.

When the buyer and seller agree on the terms of the Inspection Objection, the inspection contingency can be released and the deal can proceed.

Inspection Objection Deadline

One quick note about the Inspection Objection Deadline: Time is of the essence with inspections and submitting Inspection Objections. To ensure a timely close of escrow, it’s in both parties’ best interest to leave time to negotiate the correction of any serious inspection-related issues. So there are deadlines listed in the Contract to Buy and Sell to keep the deal moving forward.

The Inspection Objection Deadline is especially important for buyers because failure to submit the Inspection Objection by the deadline could result in forfeiture of your earnest money, or even termination of your Contract to Buy and Sell.

4. Finance Contingency

Unless the buyer is making a full-cash purchase, they will need to secure financing to buy the home. And of course, the deal cannot close until the buyer is approved for the mortgage.

The purpose of the mortgage loan contingency is to confirm that a lender has formally approved the buyer for the loan required to purchase the home and that there are no financing issues.

“Pre-qualification” for a loan is not enough to release the finance contingency. Instead, the buyer must be “pre-approved”.

Pre-Qualification vs. Pre-Approval

What’s the difference? Pre-qualification is a preliminary step to guide the buyer in their home search. Pre-qualification determines the types of loans, and potential loan amount, the buyer may be eligible for. This helps the buyer narrow their search to a more specific price-range based on what they can afford.

Pre-approval, on the other hand, requires the buyer to complete a full loan application so the lender can review the buyer’s complete credit history and financial situation, and commit to covering the loan. Learn more about prequalification vs. preapproval.

This loan commitment confirms that the buyer will be able to secure financing to complete the purchase as expected. If the buyer is unable to obtain a loan commitment from a lender, the deal cannot close, and the Contract to Buy and Sell is terminated.

Assuming the buyer is pre-approved for the loan, there’s still one last thing to consider before the finance contingency can be released: the Appraisal.

The Appraisal

The appraisal is important to the lender because the property secures the loan. Consider the lender’s point of view: if the buyer fails to make their mortgage payments, the lender will foreclose on the property, and effectively become the new owner. So the lender needs to make sure the property is worth the price the buyer is paying.

And that’s what the appraisal does. It values the property during escrow to make sure the agreed-upon purchase price isn’t higher than the value of the property.

Once the loan has been approved and the appraisal accepted by the lender, the finance contingency can be removed and the deal can proceed.

5. Final Walk-Thru Contingency

The final walk-thru contingency is the last contingency to be released prior to closing. Immediately before closing, the buyer should physically walk through the property one last time.

During this visit, buyers should confirm that:

  • The keys (including keys to any community amenities) and garage door openers work

  • All agreed-upon inspection items have been remedied and copies of any receipts for work done are provided to the buyer

  • All inclusions are still in the house

  • The property condition is as expected and acceptable

  • The property is acceptably clean

  • There are no unknown damages

  • The seller has removed all personal possessions from the property

If each of these items is acceptable, buyers can release the final walk-thru contingency.

And your real estate transaction can successfully close!

Additional Resources