The 4 Key Rules Every Contingency Contract Must Follow

When making an offer on a home, a buyer may add contingencies to their contract. There are many types of contingencies that apply to myriad situations and can protect the buyer from unexpected issues in the transaction. Sellers can also add their own contingencies either on their own or in counteroffers to protect their interests in the sale. Regardless of the type or reason, all contingencies have a few key things in common. Here are the basic rules about contingencies to help you know what to expect.

Conditional

Contingency clauses exist to achieve a certain outcome in a home sale. Therefore, the contingency is only valid on the conditions of that specific outcome. An inspection contingency, for example, depends on performing and reporting on a home inspection in the agreed time frame. The contingency lets the buyer back out of the sale if the inspection doesn’t happen or if the results aren’t given on time. Another common example is an appraisal contingency to determine whether the property value matches the purchase price.

Based on Specifics

Contingencies must have detailed and measurable results to be valid. For example, in a home inspection contingency, you must require specific improvements or repairs. This could be practically anything—from replacing leaky pipes to repairing damaged hardwood floors. As long as the desired result is specific and measurable, the contingency is valid and the contract is binding.

Deadlines

Similarly to requiring measurable details, contingencies need specific deadlines. Real estate transactions are immensely time sensitive and become even more so when there are home sale or kick-out contingency clauses involved. For example, it’s not enough to say “until the seller finds a new home,” rather it must include a time frame with a hard cutoff date. This protects both buyers and sellers from unnecessarily drawn-out closing processes and can save money as well as avoid frustration.

Binding Agreement

Contingencies are not legally binding unless the buyer and seller take steps to make them so. While it can take extra time and effort, it’s always worth it to make every aspect of the contract official, detailed and written. Both parties need to know what to do and how much time they have to do it. Without requiring an officially binding agreement, both parties face a lot of risk. Bring a real estate attorney or experienced agent into the process to make sure contingencies are valid and agreed upon by everyone involved.

Contingency contracts in real estate can help protect buyers and sellers from financial and logistical risks. Understanding what a contingency requires to be valid will help both parties determine the benefits or disadvantages of including them.