Converted from paper version of the Broad Ripple Gazette (v04n18)
The Word on Real Estate - Advice from a Pro: By Clark Giles
posted: Sept. 07, 2007
Real Estate - What are Contingencies?
My friend from Florida recently called me very excited to say that his house was sold and that he'd soon be moving back to Indy! As he talked about his sale, I realized that, unfortunately, his house was "potentially" sold but it was just as likely to not close as to close. He didn't quite understand the implications of "contingencies" in the offer.
Most offers to purchase have some sort of contingency. For example, the buyer will purchase the home contingent upon financing or contingent upon the home inspection being acceptable but many sellers don't understand the more involved contingencies.
Even in financing, a buyer may stipulate that he is getting a Federal Hosing Administration (FHA) mortgage loan. If he states he has an "FHA mortgage loan" in the offer to purchase, but he cannot secure an FHA loan (but possibly could secure some sort of conventional financing with a slightly higher interest rate or some other variable), the buyer isn't legally bound to close the home.
The other common contingency is the home inspection. Very specific wording is already available in the forms that most real estate agents use. A less versed seller could easily think that saying "based upon satisfactory inspection of the home" means if the roof and main mechanicals of the house are in acceptable condition to him, that would mean that any buyer would be satisfied. . . Quite the contrary. What is "satisfactory" to one may be totally unacceptable to another so wording such as "major defects" may avoid an easy out for the buyer.
Contingencies can mean any condition or happening specified by the buyer that can happen and the buyer will still buy the house.
One of the more worrisome contingencies would be "closing on the sale of the buyer's current home". In this scenario, you'll trade the worry of selling your home for the worry of selling the buyer's home. So, you would want to protect yourself by (1) giving a time limit as to when this has to occur, (2) receive information on the salability of the buyer's home, such as pricing and if there is already an offer, whether or not that buyer is approved and capable of closing, (3) and, most importantly, having a clause that if you have another acceptable offer on your home that the first buyer will either proceed to purchase without selling or let the second buyers complete the sale. In a market where there are many homes available, remember that agents may slow up on showing your home if there is a contingency for the sale (often called a First Right Contingency). Also, when selling your home on a contingency basis such as this, you will want to make sure that all of the other details of the offer are decided, which appliances stay, how long does the seller maintain possession after closing no matter if it closes next month or four months from now and when the inspection (or other contingencies) will be completed. Knowing early on what repairs may be necessary is better than waiting for another home to sell and then finding that you are unwilling at the price agreed to do certain repairs to satisfy this buyer.
Something as simple as "contingent upon sellers putting in a new furnace or contingent upon the spouse approving the home" would qualify as a contingency. Making sure with any contingency that everyone understands the end result and most importantly, setting a time limit will help move your home sale forward. An experienced REALTOR® will always be able to help you through these issues.