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Common Buyer Contingency Clauses in Real Estate Contracts

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As a buyer, placing a contingency in the real estate contract can be rather advantageous.  Some real estate contracts pass without contingencies, but usually in favor of the seller’s wants.  This is usually when a piece of property is being sold “as-is.”  However, outside of “as-is” contracts, each party will try to assert their bargaining power to reach the most favorable outcome in the transaction.  A seller may require that the buyer show proof of financing before the transaction goes to closing.  The buyer may require that he or she conduct a home inspection or appraisal before finalizing the deal. In a seller’s market the more contingencies a buyer has, the less likely for them to close on the property.  At the same time, contingency clauses are a powerful tool for buyers to determine whether the deal is even worth it at all.

Financing/Appraisal Contingency

A financing contingency and an appraisal contingency protect the buyer.  With a typical financing contingency, the buyer is only obligated to complete the purchase if s/he receives a mortgage commitment from an institutional lender, such as a bank.  Normally, the financing contingency has appraisal contingency built-in.  That is, the institutional lender has to be satisfied with the appraised value.  If they are not, they will not issue a mortgage commitment letter.  In some cases, the buyer can negotiate a separate appraisal contingency.  In doing so, the buyer can ensure that the property is appraised for at least the amount for which it is being sold. If the property is appraised lower than the selling price, the buyer can seek to have the contract terminated and have the earnest money deposit returned.  The effect of the lower appraisal amount is that the property is not worth the agreed upon contract price.  In other circumstances, the contingency clause may permit the buyer to close on the property even if the appraisal price is below the selling amount. The seller may also choose to lower the selling price to match the actual amount in the appraisal.  If the buyer intends to terminate the contract, they will have to do so within a certain amount of time. This is to prevent one party from holding up the transaction.

Inspection Contingency

Another contingency that is similar to the appraisal is the home inspection contingency.  This is the more common contingency around which buyers and sellers bargain.  Most buyers would prefer to conduct a home inspection for due diligence purposes before signing the real estate contract.  This is especially the case where the property is being sold “as-is.”  Ultimately, the inspection could alert  the buyer to any defects, including some which might not have arisen until after the transaction has closed.  In the traditional home inspection contingency clause, the buyer has the option to cancel the contract should there exist any defects.  Nevertheless, if defects are discovered, the buyer has the option to negotiate repairs based on the inspection report and still goes ahead with the transaction. Just with the appraisal contingency, home inspection contingencies are normally time sensitive to ensure that no one party is prolonging the transaction in bad faith.

Contact Us for Legal Assistance

Real state contracts are complex legal documents.  Buyers and sellers who sign these documents are wise to hire a real estate attorney to review these contracts.  Contracting parties do not want to wait until a dispute arises before they thoroughly vet their contract.  Instead, buyers and sellers should engage a lawyer before signing the real estate contract.  For representation in your real estate transaction, contact an experienced attorney at Meyer & Spencer, PC.  We serve individuals and families in Pleasantville, Westchester, Mahopac and Putnam Counties.

Resource:

law.cornell.edu/wex/contingency

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