Making an Offer on a Home - Contingency Clauses Explained

Unless you happen to be in the business of real estate investing, the home buying process can be confusing, particularly when it comes time to negotiate a sale. Of course, it is best to work with an experienced and knowledgeable real estate agent throughout the entire process; however, a buyer should also have a basic understanding of some of the important steps and concepts involved in buying real estate. One of those important concepts relates to contingency clauses in an offer to purchase.

When you finally locate your dream home, you and your real estate agent will make some important decisions such as how much to make an offer to the seller, who will pay closing costs, and what (if any) contingency clauses you will include in the contract. A contingency clause is a condition that is included in an offer to purchase that must be fulfilled in order for the sale to go through. A buyer can make a sale contingent on almost anything; however, there are some contingency clauses that are more common in an offer to purchase than others, including:

  • Obtaining financing – this is included is most offers to purchase and typically states that the offer to purchase is contingent on the buyer obtaining financing for the purchase. The buyer is usually required to make a good faith effort to secure a specific type of mortgage, at or below a certain interest rate, for the offered purchase price and will include a date by which the financing must be secured.
  • Satisfactory inspection – another common inclusion makes the purchase contingent upon the results of an inspection of the home. Typically, if the inspection indicates problems with the home, the buyer has the option to accept the home with the problems, request that the seller repair some or all of the problems, or back out of the contract entirely.
  • Completion of repairs – if issues are present before an inspection is even completed, the offer to purchase may be contingent on the seller agreeing to fix the issues.
  • Sale of current home – if the buyer currently has his or her home listed for sale and is unable to purchase a new home until that home sells, the buyer may submit an offer to purchase with a clause making the purchase contingent on the sale of their current home. There is usually a fixed period of time within which the prospective buyer must sell his or her home.
  • Appraised value – sometimes, a buyer and seller may agree on a sales price that is actually more than the market value of the home. Because buying real estate is usually dependent on obtaining a mortgage loan, and that financing is dependent on the appraised value of the home, an offer to purchase usually includes a contingency clause allowing the buyer to back out if the home doesn’t appraise at or above the amount the buyer needs to borrow to complete the sale.

It is very important for a buyer to understand that an offer to purchase is a legally binding contract. For this reason, a buyer should carefully consider protecting themselves by adding the necessary contingencies. What's more, it is to your benefit to work closely with an experienced real estate agent to ensure that all of the terms of the contract as well as the potential outcomes of the various contingency clauses are fully explained before you submit an offer to purchase.