Home Buyers Guide: A Guide To Contingencies In A Purchase Offer Contract

Purchasers of real estate often insert contingencies into the offer to purchase which allow them to be relieved of the contract if certain conditions are not met.

There are many methods by which a buyer can protect himself when offering to purchase real estate. These protections take the form of contingencies and are inserted into the contract to protect the buyer by allowing him to walk away from the contract under certain conditions. A contingency is simply a condition which must be met in order for the contract to remain valid. There are several standard contingencies which are written into almost all real estate contracts, but the purchaser can easily add other contingencies to the offer to purchase.

Most real estate purchase offers include a phrase indicating that the purchase is contingent on the buyer obtaining financing. This means that if the buyer is unable to obtain financing, he is relieved of the contract. This clause offers some protection to the buyer who is unsure about his ability to obtain a loan to purchase the property. The financing contingency can be further expanded to offer greater protection to the buyer, however. The purchase offer contract could contain a clause which reads that that contract is contingent on the buyer obtaining financing suitable to the buyer, or that the contract is contingent on the buyer obtaining financing at a specific interest rate. This would allow the buyer to be relieved of the contract even if some form of financing is available. The buyer who makes an offer to purchase contingent on financing might be able to finance the property for a 20% interest rate for 10 years. This would leave the buyer with a very high monthly payment. If the contract is simply contingent on financing, the purchaser may be forced to honor the contract if he can secure a 10 year loan at 20% interest. However, the purchaser who made the contract contingent on suitable financing or financing at a specific interest rate would be allowed relief from the purchase offer.

Real estate purchase offers also typically include a clause stating that the offer is contingent on a suitable home inspection. The contract can allow for the buyer to personally conduct this inspection or may permit the buyer to hire a professional to conduct the home inspection. This contingency also gives the buyer a great amount of leverage in deciding whether or not to honor the contract. It allows the buyer to inspect the property and rescind the contract if he finds the property to be in unsuitable condition. Unsuitable condition is largely at the discretion of the buyer, as most homes have some unsuitable conditions. Therefore, this contingency provides vast protection to the purchaser.

Another contingency sometimes found in offers to purchase real estate is a clause indicating that the contract is contingent upon the purchaser selling his own home. This is a very practical condition which is placed in the terms of the contract to allow the purchaser to avoid liability for two mortgages. A contract which is contingent on the sale of another property, once accepted, takes precedent over all other offers that might be placed on the property. Contracts with these contingencies typically remain valid for a specified period of time, and the contract will be voided if the buyer does not sell his own home within the time provided. This form of contingency allows a purchaser to reserve a home which he wants to buy for a certain period of time while he attempts to sell his own home.

These three broad contingencies are the most common contingency clauses written into purchase offer contracts. Purchase offers can contain any other conditions which the buyer desires. For example, some purchasers include a clause stating that the contract is contingent on a suitable septic tank inspection, and others include that the contract is contingent on the seller repairing certain defects in the property. A purchase offer contract can be contingent on anything. A creative and far-reaching purchaser might make the offer contingent on the seller leaving all of the furniture and appliances in the home. Another offer might be contingent on the buyer moving to the city where the property is located.

Contingencies are inserted into the purchase offer contract to allow the buyer to have the protection of being able to walk away from the contract if the contingency is not met. Purchasers should note that the more contingencies present in the contract, the less attractive that the contract will be to the seller of the real estate. A seller who is faced with deciding between a purchase offer contract for the full asking price that is contingent on the purchaser selling his own house and a contract for $5,000 less that than the asking price with no such contingency might often choose to accept the contract offering less money. This is simply because the seller's protection decreases as the protection of the purchaser increases. While some contingencies are necessary protections, excessive contingencies might lead to the seller accepting another offer.

© High Speed Ventures 2011