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What is a Contingency?


 In my last blog I discussed what Pending means in Real Estate and I stated: Anytime I say Pending, it means the house is under contract. Either with a contingency or not, the house is more than likely going to another buyer. It's just a matter of time until it closes and the new homeowner will be moving in.


So what is a contingency? 

Well a contingency in a contract is anything that must be first met to allow the sale to continue in the manner in which the contract was written.

Most contracts have standard contingencies to include a home inspection, a financial contingency and an appraisal contingency. Other contingencies could include a home sale. 

Home Inspection Contingency: This contingency allows the buyer to preform a home inspection (all home inspectors in the state of Virginia must have a license) and the buyer has the opportunity to ask for repairs in order for the contract to move forward. Sellers at this time can a couple of things.

  • Repair all items
  • Repair some items
  • Give a credit in lieu of repairs
  • Repair some items and give a credit
  • Do nothing
The buyer at this time must decide if they will accept what the seller will do or they have the option to back out. Most of the time the buyer can then have their earnest money returned. Please read I said, "Most of the time." 

Financial Contingency: This contingency allows the buyer to be able to get out of the contract if the lender the buyer is using cannot fund the sale. This is typically because the buyer cannot find financing. Even with a pre-approval letter from a lender sometimes things come up during and the lender will not be able to fund the loan. There are things that can come up during the funding portion of the process that really effect the buyer's purchasing power. (I will discuss that at a later time.)

Appraisal Contingency: During the lending process, an appraiser will be assigned to the property in which the lending institute will make sure their investment is at value. This means the house is worth the contracted price. If a buyer contracts with a seller to purchase the house for 300K, the appraised value must appraise either at or above the contracted price in order for the sale to continue. Now many things can happen if the house doesn't appraise in which I will discuss at a later time. This contingency allows the buyer to be able to get out of the contract is the seller and the buyer cannot agree if the appraisal comes in low. 

In the market we are in at this time, a Home Sale Contingency is one that is the hardest to get accepted although not impossible. 

Home Sale Contingency: This contingency states the buyer has a home they need to sell before the contract between the seller and the buyer can move forward. It lays out how many days the buyer of the property that is contracted for will be held before the seller can release the buyer and look for a new one. Typically, the seller will also add a Kick-Out-Clause in which gives the seller the opportunity to kick out the home sale contingent buyer if another offer comes along. The Kick-Out-Clause will give the buyer a certain amount of days to be able to continue the sale without the Home Sale Contingency (searching for new financing or moving forward with the funds without the contingency). If this cannot be met by the buyer, the they will in essence be kicked out and a new buyer will move in line to purchase the property. 

The Bottom Line: All contracts are legally enforceable that each party must adhere to. Always read your contract and ask questions to either your Real Estate Agent or a Real Estate Attorney so you know your rights and obligations.

Feel free to email me with any questions!

Thanks,

Leigh Ann


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