I’ll say it: real estate transactions are complicated. You’re signing a million forms, splaying open your finances, coordinating your move (sometimes cross-country), talking to Realtors, lenders, inspectors, title companies. There are countless moving parts and it’s imperative that your Realtor keep everything on track and, more importantly, on deadline. Contingencies are milestones set forth in the contract that allow a buyer to back out if certain conditions aren’t met in a timely fashion. These are mechanisms that protect the interests of both the buyer and the seller, preventing an instance where perhaps you get all the way to the closing table just to learn that the buyer can’t obtain financing to purchase the house. While several possible contingencies can be added, there are four main contingencies that come standard in a Missouri real estate contract.
- Title Contingency
- At closing, the seller must transfer to the buyer “marketable title” to the property via a deed. Marketable title means that the ownership of the property is free and clear of any clouds, such as liens or other potential claims of ownership. Once you are under contract, a title company will conduct an examination of the title in order to issue a title insurance policy. If the title company discovers any clouds or defects on the title, this contingency allows the buyer to object to these conditions. The buyer may request that the seller clear up the issue prior to closing, or if they wish, the buyer may simply back out of the contract with their earnest money returned.
- Inspection Contingency
- When a contract falls apart, home inspections are often the culprit. The contract allows a buyer to obtain professional inspections of the property in order to gain a better understanding of the home they are purchasing. If the inspections uncover any issues that are unacceptable to the buyer, the inspection contingency gives the buyer a couple of options. First, the buyer can choose to back out of the contract with their earnest money returned, though they still must pay for the cost of the inspection(s). Or, the buyer can request that the seller fix the issue. This opens up a negotiation window allowing the parties to go back-and-forth about what and how the seller will fix the problem, either through repairs or sometimes a closing cost credit or price reduction in lieu of repairs. If the parties can’t reach agreement within the specified time period, the buyer may back out of the contract with their earnest money returned.
- Financing Contingency
- The buyer is likely already pre-approved for a mortgage at the time their offer is written, but the real work begins once the contract is finalized. The buyer’s lender will get to work on securing the loan, which can include a formal loan application, credit report, appraisal (more on this later), pay stubs, tax returns, and more! If the lender discovers something that will prevent the buyer from obtaining a loan at the contracted purchase price, the financing contingency allows the buyer to terminate the contract with their earnest money returned.
- Appraisal Contingency
- Though the buyer’s loan may depend on an appraisal, it is a separate contingency. In most cases, the buyer’s lender will require a formal appraisal to ensure that the property is worth the amount that it is being purchased for. If the appraisal reveals that the home is worth less than the contracted purchase price, the lender will only loan the buyer the appraised amount. Enter: appraisal contingency. In this scenario, the buyer has three options: terminate the contract with their earnest money returned, make up the difference between the appraised and contract prices in cash, or ask the seller to reduce the purchase price to the appraised amount. The buyer and seller can negotiate on the purchase price and if they fail to reach agreement, the buyer may back out of the contract.
All of these contingencies are important safety tools in a real estate transaction, but they only exist within a timeframe. If a buyer slips up and misses a contingency deadline, they could forfeit their earnest money, or worse: end up in litigation. Make sure you enlist a trusted, experienced Realtor to keep the transaction on track and get to the closing table on time.