Understanding the importance of home buying contingencies

May 26, 2011

The purpose of home buying contingencies is to allow the parties to accept a conditional agreement prior to incurring the time and cost required to verify representations, investigate pertinent details or complete critical actions. This is an area where you must communicate clearly and read the contingency carefully to verify your conditions are understood.

What are home buying contingencies?

Home buying contingencies are contractual requirements regarding fundamental aspects of the transaction upon which settling the contract is dependent. Because a home is an expensive and complex structure, it is often difficult or costly to address all issues prior to agreeing on the terms of a purchase or sale. The real estate industry uses “contingencies” to help outline the needs of buyers and sellers and to encourage accurate and clear communications during the transaction in an effort to reach an agreement. Although you should be able to depend on the expertise of your agent, it is critical you understand the importance of contingencies, the purpose of them and how agents draft them.

Why Are Contingencies Necessary?

These requirements usually can’t be confirmed during the negotiation process due to time and cost constraints involved in satisfying issues like financing, inspections and appraisals. If certain requirements are miscommunicated, or not included in the offer but are necessary to either party, problems are likely to occur.  This is true for both buyer and seller. The purpose of contingencies is to allow the parties to accept a conditional agreement prior to incurring the time and cost required to verify representations, investigate pertinent details or complete critical actions. This is an area where you must communicate clearly and read the contingency carefully to verify your conditions are understood.

Getting Drafted

As mentioned previously, it is the task of your real estate agent to draft concise contingent statements for each particular transaction. In certain states, the state provides pre-approved contingency forms tailored to specific issues that are simply fill in the blank documents. It is my belief you must carefully read each statement to make sure it correctly conveys your thoughts and wishes. Here are some basic guidelines to follow when evaluating a real estate contingency:

  • It should be specific to avoid misinterpretation.
  •  It should be as reasonable as possible so as not to put either party in a situation that has no hope of being resolved.
  •  It should include time limits so as not to be interpreted as open ended.
  •  It should include definitions whenever applicable and always utilize clear language.
  •  It should include the “five W”‘s. Who, what, why, when and where and if there is a cost who pays for it.

Many misunderstandings can be prevented if the contingency is properly drafted. Contingent statements are an excellent way to communicate concerns and are submitted in good faith to facilitate your housing goals.

Become Familiar

Here is a list of some of common contingencies below. This is only a partial listing. Their use in completing your transaction may or may not be applicable to your situation.  Basically these are issues addressed by contingencies; they are not the actual wording of the contingent statement. You should become familiar with these and any other considerations unique to your particular situation.

Common Contingencies – “This agreement is subject to…

  • Obtaining financing
  • Well and septic inspection
  • Home inspection
  • The sale of buyers home
  • Survey of the property boundaries Repairs to be made by the seller A primary offer
  • Energy inspection or improvements Code compliance inspection
  • Joint driveway or well agreement Radon test
  • Buyer pre-closing walk-thru inspection Urea formaldehyde foam disclosure Perk test
  • Repairs or improvements by buyer before closing
  • Safe water test
  • Successful closing of another real estate transaction
  • Zoning changes

We recommend that you learn which contingencies may apply to your specific transaction. It will be helpful to familiarize yourself with what a contingency is, its purpose and how an effective statement is drafted. You will find that contingencies will be a valuable tool during your purchase or sale. Do not wait until you are in the heat of a negotiation to contemplate what obstacles you will have to deal with. As an example, if you will need a mortgage, review the standard contingency when you review the “offer to purchase” form.

Ask me if you have a question. I will answer you.

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