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Why are contingency clauses used in real estate contracts?

On Behalf of | Aug 31, 2023 | Real Estate |

When buying and selling homes, people sometimes use contingency clauses. Essentially, the whole of a contract is contingent on these specifications. Certain stipulations have to be met for the offer to stand.

Contingency clauses are commonly utilized in mortgage contracts. A potential buyer may make an offer for a home but indicate that, if the bank turns them down for the loan, they don’t have to take on the debt for the property. They are only bound by the offer if they do get the loan, which they expect that they will. A contingency clause gives them some protection. If something unexpected happens and their funding gets denied, they can walk away from the purchase without penalty.

Another common use of contingency clauses involves home inspections. Even if a buyer walks through a home and thinks that everything looks in order, they may want to have an official, licensed inspector do the same before they take possession of the home. This helps to demonstrate the true value of the home so that they know what they are purchasing. If the home fails the inspection, they may be able to walk away from their offer thanks to a contingency clause.

Why are they sometimes removed?

In some cases, potential buyers remove contingency clauses. They may eliminate the clause from a contract saying that a home inspection is necessary, for example. When such a clause is removed, no matter what happens when the inspection is carried out, they still have to purchase that home for the offered price. They are bound by the contract they offered, even if it becomes clear that the home is not worth as much as they believed that it was.

The main reason to remove a clause is to make an offer more attractive than those presented by competing buyers. If a seller gets two offers for the exact same amount of money, and one has a home inspection contingency clause and the other doesn’t, they are more likely to take the offer without the contingency. Buyers who don’t want to increase their offer total may remove contingencies instead.

With that said, removing contingencies is also a major risk. This is just part of the reason why buyers and sellers both need to understand their rights and options when engaging in a real estate transaction.

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