So, what is a contingency? You see CTG or contingent all over real estate websites and know that it means that you can’t buy the house, but what does it actually mean? In a general sense contingent means that a sale price has been agreed between a buyer and seller and that the property will be sold once some actions (contingencies) have been completed. Once those contingencies have been completed the closing can happen but if they aren’t completed or are not completed on time then the closing may not happen. Contingencies exist to protect one or more parties in the transaction. This article will discuss the most common contingencies as well as how and which party they protect in the transaction. The 4 most common contingencies are attorney review, inspection, mortgage and board approval (for HOA’s).
The attorney review contingency is not done in every state but it is common in many states so we will discuss. Contracts are used in purchasing a home and it is important to have an attorney review all the aspects of the deal to make sure their client is protected. Both the buyer and seller will hire an attorney to ensure that the other contingency dates are hit (see below). They will also negotiate for each party on the inspection report. During the closing, the buyer’s attorney will explain all aspects of the mortgage contract that the buyers will sign so that they have a good understanding of what they are signing. On the seller side the attorney will ensure that the deal is in his or her client’s best interest and if it isn’t they will negotiate to make sure that it is. Attorney’s know contract law so it is better to have them handle this portion of the closing process. This protect the buyer and the seller.
The inspection is a contingency put into place to ensure safety of the home that is being purchased. This affords the buyers the ability to enter a home with a professional inspector and make sure that the property is not only safe but also the mechanical and electrical products work properly. If something is found that is dangerous during the inspection the buyers have the right to end the deal (and get their earnest money back) using the inspection contingency. This contingency protects the buyers in the transaction.
The mortgage contingency is designed to protect the seller of the home. When a contract is initially written the buyers will put a specific date in for the mortgage contingency in which his or her clients will have to receive a loan approval before. This is done so that the sellers can re-list the property if their current buyer cannot get the financing to get the deal done. If the buyers fail to get their final loan approval before the date then the sellers have the right to take the earnest money that has been deposited. It is very important for the buyers to have an attorney at this point as the he or she will protect the buyers from losing their earnest money or extend the mortgage contingency date. Get an attorney and get a good one!
The HOA contingency is designed to protect the buyer’s lender. This contingency is only done when the home in question is part of an HOA. During the buying process certain aspects of the HOA can alert a lender and caution them from providing a loan to the buyer. Such things that will alert the lender are special assessments, improper handling of funds, too many renters and a run down building. A lender is funding a huge portion of this purchase and they want their investment protected as well. This contingency also protects the buyer as they get a chance to dig deep into what is happening in the building. They will be provided the last 2 years worth of board meeting minutes as well as its financials. If something alerts the buyer, the buyer can back out of the deal without losing earnest money.
There are other contingencies that are used as well but these four are included in a large portion of home sales. Most buyers and seller will have to deal with these contingencies in one or more of their home transactions so understanding these contingencies is important.