What Are Contingencies in Real Estate?

Craig Donofrio

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Craig Donofrio

January 21st, 2022
Updated January 21st, 2022

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Contingencies are clauses in a home purchase contract that allow the buyer or seller to back out of a deal without penalty if certain conditions are met. Think of them as deal breakers. Most contingencies protect buyers' earnest money deposits if they hit a hurdle, though a few contingencies protect sellers' interests.

Purchase agreements vary by state or even metro area. They can come standard with certain contingencies, which may be called by different names, and should have deadlines. If the deadline on a contingency passes and you haven't acted to leave the deal, it will often be automatically waived. Other contingencies must be removed in writing.

Inspection, appraisal, financing, and title contingencies often come standard in one way or another. When you make an offer on a home, you can cross out the contingencies you want to waive or introduce new ones. The seller can then negotiate their terms or add their own contingencies. When a home is under contract with active contingencies, the listing status is "contingent." Once all contingencies are met, the listing becomes "pending."

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Listing status: Pending vs. contingent

  • A "contingent" listing means an offer has been accepted but the deal depends on meeting contingencies. These listings can still fall through — sometimes they will say "accepting backup offers."
  • A "pending" listing means the contingencies are met and the deal is in its final phases. These deals rarely fall through.
💡 Pro tip: If you see a possible dream home but it's listed as either pending or contingent, have your agent reach out to the seller's agent. It's possible that the listing was labeled inaccurately, the status has changed, or the agent used these statuses interchangeably.

» MORE: Contingent vs. Pending: What's the Difference in Real Estate?

How contingencies affect home sales

Contingency clauses are very common in real estate deals: in January 2020, about 75% percent of purchase contracts had at least one contingency, according to the National Association of Realtors.[1] Because they add complexity to the sale, they're also a major cause of delays — and some issues can take days or weeks to resolve.

When markets heat up, buyers can waive contingencies to make their offers more attractive — which can speed up the sale.

This guide breaks down the most frequent contingencies you'll come across in a home purchase contract, as well as when you should consider adding or waiving them.

3 most common contingencies

Inspection | Financing | Appraisal

Inspection contingency

Home inspection contingencies let the buyer walk away if the inspection uncovers something serious. The last thing you want as a new homeowner is to spend thousands of dollars on unexpected repairs after closing.

» LEARN: How Much Does a Home Inspection REALLY Cost?

If you're considering waiving any contingencies to make your offer more competitive, most agents and real estate experts recommend NOT waiving the inspection contingency. Otherwise, you're buying the home as-is, along with all of its problems.

Only consider waiving your inspection contingency if you:

  • Can afford to deal with any and all unforeseen problems with the house — including major ones like a bad foundation or a high-radon area

  • Are willing to forfeit your earnest money deposit if the inspection uncovers any deal breakers

After a home inspection, the inspector submits a detailed report of the home's general condition. You will typically have 7–15 days to enact the contingency and walk away with your deposit.

🕵 In Texas, you can buy an option period: a 10-day window where buyers can inspect the home and exit the deal for any reason — and still keep their deposit. Adding an option period typically costs around $100.

A repair contingency focuses on repairs up to a dollar amount.To show the seller you're serious, you can modify the generalized home inspection contingency:

  • A hazard contingency targets specific environmental hazards, such as radon, lead paint, or pests.

For example, with a $5,000 repair contingency and a mold contingency, it would take over $5,000 worth of needed repairs OR the presence of mold for you to walk from the deal.

Financing contingency

Financing contingencies — also known as mortgage contingencies — let the home buyer exit the deal if they can't secure a proper loan, usually within 30 to 60 days of the offer being accepted.

If you need a loan to buy a house, a financing contingency offers an extra layer of protection. If a lender denies your loan — because of an unclear title, a low appraisal, or any other financing-related issue — you can use the financing contingency to exit the deal without losing your deposit.

If you're buying a home in a competitive market or financing is not an issue, you can waive the financing contingency to improve your offer. You might opt to waive your financing contingency if you’re:

  • Making an all-cash offer, so no financing is involved

  • Confident you’ll be approved (and are willing to lose your deposit if the loan falls through)

  • Using seller financing to fund the purchase

Financing contingencies can be written in specific terms, like the exact dollar amount of the loan and the maximum interest rate the buyer will accept. The specific time frame can also be negotiated or depend on the market — for example, boilerplate financing contingencies in California have a deadline of 21 days.

🤔 Choosing between a financing or appraisal contingency

If you want to make your offer competitive by minimizing the number of contingencies, consider prioritizing financing. Because the financing contingency can be used in any instance where the lender denies the loan, the terms covered in a financing contingency may be able to cover those in an appraisal contingency.

If a home appraises for less than the sticker price, you have a few exit strategies:

  • If the lender cancels the loan, you could use either the financing or appraisal contingency to exit the deal because you were unable to secure financing or the appraisal came in low, respectively.
  • If the lender is still willing to finance, you can invoke the appraisal contingency because the home appraised for less than the contract price.
  • If the lender changes the financing terms, you can use the financing contingency if the loan terms are beyond a specified amount or interest rate.

Appraisal contingency

Appraisal contingencies let buyers off the hook if the house appraises for less than the sales price. If the appraisal comes in low and there's no contingency, the buyer faces a lose-lose situation: come up with the difference between the contract price and the appraised value, or forfeit their deposit.

A low home appraisal can be grounds for the lender to deny the loan altogether, and it can mean that the home isn't as valuable an investment as the buyer initially thought. As such, appraisal contingencies are the most common source of delayed or terminated contracts.[1]

» LEARN: What Is a Home Appraisal and Do I REALLY Need One?

Do I need an appraisal contingency?

You should consider adding an appraisal contingency clause if you:

  • Don't have enough cash on hand to cover the potential gap

  • Have put down the maximum down payment

  • Have a weak credit score

You could waive the contingency if you:

  • Are confident the home won't appraise for less

  • Have enough cash to make up the difference

  • Are willing to make a larger down payment

If you want to stand out as a strong buyer in a hot market, but you're uncomfortable waiving the contingency entirely, an appraisal gap contingency can be a middle ground for both you and the seller.

Appraisal gap contingency

The appraisal gap contingency lets you exit a deal if the home you want to buy appraises for a specific amount less than the purchase price. Otherwise, you'll have to come up with the difference between the appraised value and the sticker price — the appraisal gap.

Here's how an appraisal gap contingency can work: let's say the home's asking price is $300,000 and you have an appraisal gap contingency of $15,000. If the appraisal comes in $15,000 below asking price, you're on the hook for the entire amount. If it appraises for $16,000 below, you can safely exit the deal.

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Other buyer contingencies

Title contingency | Home sale contingency

Title contingency

Sometimes called a marketable title or survey clause, a title assurance lets you leave the deal if there's something amiss with the title — i.e., the right to own a particular house. This contingency might be required by your lender or local government, but it's highly recommended to include regardless.

Why do I need a title search?

As part of the home-buying process, the title company performs a title search to uncover any issues — like liens, easements, or boundary disputes — that could prevent the buyer from being granted the title. If you buy a home with a problematic title, your investment in the house is at risk.

Even if you don't include a formal title contingency, you should still perform a title search. Title histories are public records so you can do the search yourself — some can be accessed online through your country's appraisal or clerk's office.

Title insurance

Most mortgage lenders require the buyer to purchase title insurance as part of closing. On rare occasions where an issue arises that wasn't uncovered during the title search, title insurance will cover legal expenses to defend your ownership and reimburse you for related financial losses.

» LEARN: What Is Title Insurance — And Do You REALLY Need It?

Home sale contingency

The home sale contingency lets the buyer exit the contract if they can't sell their current home. This contingency is usually used when the buyer can't float two mortgages and wants extra security.

Sellers don't like home sale contingencies since they add both time and uncertainty, so you probably only want to use them in a buyer's market.

There are two types of home sale contingencies:

  • A settlement contingency prevents the seller from accepting other offers, meaning they have to wait until the buyer's home is sold. It's typically used for when the buyer's home sale is underway but not yet closed.

  • A sale and settlement contingency is a type of kick-out clause that allows the seller to accept a better offer that comes along before closing.

Want to make a cash offer but still need to sell your house first?

Consider using a real estate tech company that will let you buy a new house before selling your current home. Companies like Homeward, Knock, and Orchard can let you take out large amounts of equity to make a cash offer. Some, like Knock, offer bridge loans and home-swap products.

» LEARN: What Is an iBuyer? (And Should I Sell My House to One?)

Contingencies that protect sellers

Home of choice contingency | Rent-back contingency | Kick-out contingency

Sellers can include contingencies in real estate contracts, too — typically as a way to guarantee they have a place to live or move into.

Home of choice contingency

Also known as the suitable property contingency, the home of choice contingency allows the seller to cancel the deal if they can't find another house to buy. The time frame is specified in the contract: it could be weeks if the seller has a place lined up or months if they're still house hunting.

A home of choice contingency can turn away buyers, who may not want to wait around for a house that may ultimately not be available. Sellers who fear being left without a place to hang their hat may also want to consider the rent-back contingency.

Rent-back contingency

The rent-back or lease-back contingency lets sellers remain in their home as tenants to the buyer. Most lenders will allow renters to only stay for 60 days before considering it an investment property, which means higher mortgage rates.

The rent-back contingency can be a good option for sellers who are worried about finding another place to live. It also offers the buyers more leverage since the sellers can't stay in the home forever or scrap the deal if they can't find a new home.

The downside to a rent-back contingency is that the buyer and seller will need to figure out an agreement that includes things like rent, security deposit, and utility payments.

Kick-out clause

Kick-out clauses let the seller withdraw from a sale under certain conditions — mainly the home sale contingency — in favor of a better deal.

If a buyer includes a home sale contingency, the seller can negotiate for a sale and settlement kick-out clause, allowing them to keep showing their home while the buyer searches for a new house. If a better offer comes along, the seller must present the buyer with a 72-hour notice to perform to remove the contingency or leave the deal.

» MORE: What Is a Kick-Out Clause?

Backing out of a contingent contract

If one of your deal-breaker contingencies has not been met by a certain deadline, you can safely exit the home sale and get your earnest money deposit back. If you choose to leave for any reason other than the ones listed in your agreement, you risk losing your deposit as a penalty.

Buyers have to notify the seller in writing about invoking a contingency and their intent to cancel the contract. Without seller contingencies in place, sellers have very few options to back out of a deal after the contract is signed.

» MORE: Can a Seller Back Out of an Accepted Offer on a House?

If you can prove that either party breached the contract, misrepresented the sale, or committed fraud, you may need to take legal action to void the sale or receive damages.

Serious faults or hazards discovered after the home sale may be grounds for a breach-of-contract lawsuit. Sellers may be held accountable if the seller knew about the hazards and thwarted your state's disclosure laws — otherwise, the home inspector may be on the hook if they were negligent.

Notice to perform

The notice to perform is a document that sets deadlines for sellers or buyers to meet or remove contingencies. Some states, like California, require a notice to perform before a real estate contract can be canceled.[2]

In practice, a notice to perform is a more aggressive maneuver than just reminding the buyer or seller about deadlines:

  • Sellers may be looking to wrap up contingencies if the buyer is taking too long to put down earnest money or hasn't shown their pre-approval paperwork.

  • Buyers may be prodding sellers if they're dragging their feet on things like property disclosures.

» MORE: What Is a Notice to Perform and When Can It Be Used?

FAQs about contingencies in real estate

Contingencies are optional clauses in a real estate contract that state something must happen before closing — essentially, deal breakers. If the contingency isn't met, the buyer can walk away with their deposit. If a buyer wants to end the sale for a reason other than the ones listed in the agreement, they may have to forfeit their deposit.

Contingencies are optional clauses, but they can provide a necessary layer of protection for both buyers and sellers. Some, like the home inspection contingency, are fairly common, but they can be modified or removed to make an offer more attractive. A non-contingent offer — i.e., one with no conditions — might stand out if the seller wants to move fast.

Most home buyers may want to protect their investments by including one of these contingencies in their offers: inspection, financing or appraisal, or title contingencies.

You can modify or waive them to make your offer more attractive, but be aware of the risks of not including the contingencies that protect your financial well-being.

You can make an offer on a home listed as contingent, but unless the seller has a kick-out clause in their current purchase agreement, they may not be able to accept your offer. Some sellers simply like to line up back-up offers.

Related links

ARTICLE SOURCES
[1]

National Association of Realtors. "Realtors Confidence Index Survey January 2020." Accessed January 18, 2022.

[2]

California Association of Realtors. "Contingencies and Cancellation." Accessed January 18, 2022.

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