Contingencies & Negotiations in Real Estate Contracts

Some buyers make an offer to buy a home before they even list their own home for sale. However, they need to sell their present home in order to come up with the down payment to make the purchase. So they make their offer “conditional” on the successful sale of their own home. That is a “contingency.” Actually, it is a major contingency.

Contingencies are important in real estate contracts because they limit a buyer’s or seller’s responsibility to fulfill the contract and close the deal. Some are major, some are minor. Some contingencies are frowned on — others are not. Other contingencies are “normal.” For example, in a seller’s market most sellers would not accept the contingency listed above. A potential buyer with a home to sell should already have their home listed AND have an accepted offer from a “ready, willing and able” buyer. Other contingencies make perfect sense.

For example, a buyer might want to make their purchase “contingent” upon their ability to obtain financing. If they can’t get the loan, they can’t buy the house anyway, so it is a contingency that makes sense. Another buyer may want to make his offer contingent on the home appraising at (or above) the purchase price. Since the appraiser is hired by the lender and is independent of the actual transaction, that is another contingency that makes sense. In addition, there are loads of inspections. Buyers will often want to make sure the property passes these inspections, so these become additional contingencies… …and that is what makes a real estate contract different than most contracts. Most contracts are set at the time of offer and acceptance. They are a “done deal” and both parties are liable to fulfill their obligations no matter what. If either party attempts to renegotiate any point, the other party can “void” the original offer and acceptance.

Real estate contracts have specific clauses which allow renegotiation in limited areas. For example, a real estate contract may require a buyer to get his home inspection completed in fourteen days. It allows the buyer three days (or whatever) to review the inspection and report any problems to the seller. If no problems are reported, that contingency automatically disappears. Suppose the inspection is performed within the required time frame, it shows a cracked tile in the corner by the fireplace, and the buyer reports that problem to the seller. What happens next? The buyer and seller renegotiate that aspect of the deal. It’s a legal contingency. It is subject to renegotiation. The seller may decide to replace the tile — or he may decide not to replace the tile. The buyer decides whether it is worth losing the house over a broken tile or not. The seller decides whether it is worth losing a buyer over a small thing like a broken tile. That example was purposely minor. The problem could be a faulty roof. That would require more serious thought.

Contingencies are a part of real estate contracts and so are renegotiations — but only in limited areas and according to the contract. Some buyers and sellers never fully read the contract — be sure to read yours.