Contingency provisions, or “if” clauses, are those conditions in real estate contracts that must come to pass before a sale closes. If the conditions do not occur, the sale will likely not occur unless the parties can negotiate a different agreement that resolves the issue.
While parties can theoretically include any contingency provisions in their real estate contracts, some contingency provisions are common in real estate contracts, as follows.
Loan Approval
One of the first contingencies you generally see in a real estate contract is a loan approval contingency provision. For instance, the Arizona Association of Realtors® Residential Purchase Agreement provides the following loan contingency:
Loan Contingency: Buyer’s obligation to complete this sale is contingent upon Buyer obtaining loan approval without Prior to Document (“PTD”) conditions no later than three (3) days prior to the COE Date for the loan described in the AAR Loan Status Update (“LSU”) form or AAR Pre-Qualification Form, whichever is delivered later. No later than three (3) days prior to the COE Date, Buyer shall either: (i) sign all loan documents; or (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions AND date(s) of receipt of Closing Disclosure(s) from Lender; or (iii) deliver to Seller to Escrow Company notice of inability to obtain approval without PTD conditions.
The contract usually also contains an “unfulfilled” loan contingency. Essentially, this provision explains what happens if the buyer cannot get loan approval after making good faith efforts to do so, especially concerning the return of any earnest money paid toward the deal. Of course, the parties can agree to a longer timeframe than three days for loan approval.
Appraisal Contingency
Many real estate contracts contain an appraisal contingency. An appraisal gives the value of the home. For the buyer, this figure is critical, as the lender is unlikely to loan the buyer any more than the appraisal amount. If the appraisal amount turns out to be less than the agreed-upon purchase price, then the seller may have to lower the purchase price, or the buyer may be able to abandon the contract.
Home Inspection
Another common contingency provision in a real estate contract is a home inspection contingency. Some of these provisions allow the buyer to back out of the contract completely if an inspection reveals problems with the property or if the seller refuses to remedy the problem. Alternatively, a buyer can demand that the seller fix the problem, lower the purchase price, or credit the buyer to pay for the needed repairs if they still want to go through with the sale.
Seller Finding Suitable Housing
Many people who are selling their homes also are looking to find another home for themselves. Therefore, when they enter a purchase agreement to sell their home, they often will make that sale contingent on them being able to buy another home or finding suitable housing. Depending on the circumstances, a buyer may or may not be willing to accept this contingency. For example, if the buyer is highly motivated and needs to find housing quickly, they may pass on the contract to find another house that is not subject to this type of contingency.
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