What is contingency?
A contingency is a possible bad event that can happen in the future such as an economic recession. In real estate, a contingency can mean anything that can prevent a deal from happening. If a house or a property someone is buying has contingencies, some requirements on it must pass in order to finalize the deal. Otherwise, the contract could be eliminated or become null.
Real estate managers and analysts always plan for contingencies in the near future or long term. By doing so, they prepare and protect themselves for possible downturns.
Example of real estate contingencies
- Appraisal
- Home inspection
- Home inspection
- Sale of another home(s)
- Mortage
- Etc
Why contingencies?
The buyer of a property can use an appraisal contingency to evaluate the price of the property they are buying. Should the price come out much lower than the asking price? The buyer could walk away because the contingency requirements did not pass.
Also, buyers can use home inspection contingency. The contingency could state that the deal will be finalized only if the property they are buying passes home inspection and has a clean record. If the property fails the inspection or the record is not clean, the buyer can walk away from the deal. Learn about the top 7 reasons you should get a home inspection before you buy it.
More benefits of contingency
Contingencies can help both buyers and sellers in real estate. For example, let’s say that a buyer is interested in a property. Before they buy this new property, they will need to sell a house they are currently living in to raise a payment.
The buyer can use the home sale contingency to protect themselves. Two things will happen.
- If they find a buyer for the current home, they will continue with the deal
- if they do not find a buyer, they will abandon the deal because they don’t have money to buy this new home.
This might sound like only the buyer will benefit from this situation. However, this plan will also help the seller. With this contingency in place, the seller knows that the success of the deal will depend on the sale of a property owned by their potential buyer.
For this reason, they will keep the property on the market instead of waiting for the buyer who is also trying to sell their home.
Everything happens through negotiations. If the seller finds another buyer, he/she can still sell the house.
