Almost every real estate contract contains a plethora of contingencies and disclosures. In real estate, a contingency is a condition in the agreement of sale that must occur for the transaction to move forward. There are many different contingencies that one can use in a real estate contract depending on the specifics of the transaction. However, there are five main contingencies that real estate buyers commonly use when purchasing a home.

Another component of real estate transactions that home buyers should keep an eye out for is disclosures including natural hazards, lead paint, and sold “as is” exemption. Knowing what each of these disclosures mean can keep you informed during the process or raise a red flag if you do not see any of these disclosures in the agreement. Below is a general overview of contingency rules, common contingencies, and disclosures present in most real estate contracts.

Real Estate Contract Contingency Rules

A contingency requires that one or both parties meet certain prerequisites before a real estate transaction can be completed. However, contingencies still allow the parties involved in the deal to negotiate and compromise—which in some cases can lead to confusion. This confusion largely stems from buyers or sellers failing to learn the basics of contingency contracts before signing one of these agreements. Below are the general elements associated with contingency contracts that can help you prepare to sign this contract.

Contingency Rules

• Contingency contracts are conditional: The validity of a contingency contract depends entirely on if one of both parties complete certain tasks. No matter the type of contingency present in the contract, this provision will determine whether or not the contract continues to bind both parties. For example, say you take out an insurance policy for the property you purchase. Receiving money from this policy is contingent on fire, flood, or other types of disaster. If there is no disaster, there is no reason for the insurance company to provide funds.
• Base contingencies on specific events: In order for the contingency contract to succeed, you must state-specific and measurable elements. People commonly get in trouble when they state vague requirements such as “property must have improvements.” This is an issue as there is no way to legally interpret whether or not the seller meets the contingency. Instead, the contingency could require that the seller replaces carpet in certain rooms or install a new heating and cooling system.
• Contingencies need deadlines: The real estate closing process is time-sensitive. Further, many people do not want to wait more than 2 – 3 months to finish a transaction. To keep a realistic closing period, the contingency contract should also create deadlines for both parties to meet. This ensures that the process moves smoothly and both parties will be accountable if they fail to meet the contingencies.
• The agreement should be binding: Both the buyer and seller should ensure that the contingency contract is official and binding. This protects and gives both parties legal options if either party fails to meet its contingencies.

Inspection Contingencies

Unless you are purchasing a tear-down property or a simple piece of land, you should include a home inspection contingency. This provision will allow you to cancel the deal. That is if the home inspection finds significant or expensive repairs—especially those in the home structure or foundation. One important point is that states and even cities have different laws on home inspections.

The home inspection involves an expert walking through the property and examining it for structural problems or damages. This inspection can also include electrical, pest, and lead-based paint inspectors.

This is an extremely important part of the home purchasing process so you should not overlook or take this part of the process lightly. Thus, you must include a contingency that allows you to walk away from the deal if there are issues with the property. For example, you would not want to buy a property that needs a new roof for the same price as a property that does not need this fix. The contingency is also useful as it allows you to leverage the ability to walk away into getting the seller to pay for the cost to repair the property.

Financing Contingency

In most cases, the home buyer will not have enough money saved up to make a cash-only offer. This means that the buyer will have to take out a mortgage. However, before creating the purchase offer, the buyer must check the potential interest rate on the loan and where this loan fits into your current debt obligations and credit score. Further, the purchase offer should be contingent upon obtaining financing at a specified interest rate.

This contingency is extremely important for a few reasons. First, if you understand that you do not have the income to pay a mortgage that has above a 5 percent interest rate, do not put a rate higher than this on the agreement. If you do not follow this suggestion and are only able to secure an interest rate above 5 percent, the property seller will be able to keep the earnest money deposit.

Other information such as whether you need to secure an FHA or VA loan must also be included in this section. Finally, if you are planning on paying cash for a home, you should state this in your offer as well. This is because if you do not have to go through the mortgage process, the deal is more likely to go through.

Appraisal Contingency

The appraisal contingency is connected to the financing contingency. Further, getting an appraisal is typically the most important condition banks have before granting a loan. The reason for this is because the appraisal determines the fair market value of the property.

Title Contingency

When dealing with any type of real estate, the title to the property is the record and proof of ownership. This legal document simply shows who previously and currently owns the property. Further, this document also shows any liens or judgments that have been made against the property. In most cases, a real estate attorney or title company will review your title and if any issues are present, they will work to resolve them.

However, there are certain cases where title issues cannot be solved before the closing of the property. This case is the reason why a title contingency is important. With this contingency, you can back out of the deal if the title cannot be cleared before the sale of the property.

Home Sale Contingency

If you are an existing homeowner, it is likely you will use the funds from the home you are selling to pay for the new home you are purchasing. In this case, you should include a contingency in your purchase contract stating that your buying a property is contingent on selling your current home. Most people will state that they need 30 – 60 days to sell their properties and if they cannot meet this, the purchase agreement is void.

Types of Disclosures

Property disclosures can help show the conditions of the home you are considering buying such as condition of the property, safety of the neighborhood, and other important details. The four common disclosures present in most real estate contracts are below.

Standard Disclosures

The majority of real estate associations across the country provide similar forms that sellers can use to clearly state what is and is not an issue on the property. These forms will typically include major issues on the property. However, they will likely not state issues such as homeowner association obligations, missing mechanical items, or stigmatized properties.

Natural Hazards

This specific disclosure will state natural hazards in the area such as fires, floods, and earthquake zones.

Lead Paint

The federal government requires any home built before 1978 to fill out a lead paint disclosure form. Additionally, potential buyers must also have a 10-day window to test for lead if they desire.

Sold “as is” exemption

Sellers must share all known defects or issues on the property. However, buyers can instead opt to complete the transaction “as is”. If both parties agree to this, the seller does not have to repair, correct, or replace anything on the property. This is true no matter what is found during the home inspection.

Final Thoughts

With over 20 years of experience, Antonoplos & Associates real estate attorneys have the knowledge and experience required to assist clients with real estate litigation in DC, Maryland, and Virginia. Furthermore, our attorneys have a strong background in real estate, construction law, and business law. Because of this experience, we are can assist clients with most aspects of real estate litigation. Finally, we are able to help you before, during, and after your real estate litigation. This is true whether you need assistance with personal or commercial legal issues.

Contact Our DC Law Office for More Information

Finally, for more information on common real estate contingencies and disclosures, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding real estate law, check out our blog.