The Importance of Contingencies in Real Estate Contracts: Suggested Contingencies and Why You Need to Know About Them

Many consumers rely on Realtors for their expertise in real estate. This is fine. However, it is just as important for the consumer to understand the types of contingencies that are typically suggested in a contract. This knowledge can insure that their Realtor is looking out for their best interest and that they do not leave anything out of the contract. Contingencies are provisions that are placed on a contract that requires a certain outcome to be done before the contract becomes binding. An example is a contingency to have a building inspection done within a set period of time.

Before I go further, it is important for consumers to understand the difference between a Realtor and a real estate sales agent. Let me first clarify what a Realtor is.

The word "Realtor" is a term that is given to someone who belongs to their local real estate board. You can work with a real estate agent who is not a Realtor, but has the same knowledge as a Realtor. However, the difference is that the real estate sales agent may or may not have the proper tools to serve you as well as a Realtor.

An example of this is that Realtors belong to a Multiple Listing Service (MLS) that is complete with all their local Board of Realtor's listings. You do have online resources like Realtor.com to browse through listings. However, Realtor.com does not have all the MLS listings. A Realtor or real estate agent pays Realtor.com for their services. Not all Realtors or real estate agents will chose this option because some of them want to keep their advertising expenses down. Hence, Realtor.com is not a reliable source for all the MLS listings.

Realtors are given a standard contract by their local Board of Realtors. These standardized contracts typically are written with a "win, win" outcome in mind, meaning a non bias contract. Typically, it will have some contingencies already included: contingencies on financing, termites, appraisals, just to name a few. However, every real estate transaction can be unique to its own. And this is where addendums come into play. An addendum is an attachment to the contract that will supersede anything written in the contract. This is where the contingencies are placed.

In the real estate business, it is only through experience in a variety of transactions that a good Realtor or agent will know how to protect your interest with contingencies. I have been a real estate broker for 18 years and have had involvement with simple residential transactions, foreclosures, commercial real estate and land development. I no longer practice. However, what I learned enables me to protect myself in any real estate transaction. So, with that said, I shall give you a couple of my favorite contingencies that have worked well for me.

Tip 1

On the addendum, I prefer to use a blanket contingency which I call a "feasibility study." With all contingencies it is important to have set time periods. Without a time period set, it creates confusion as to when the contingency should be accomplished. It's important that there is always a "meeting of the minds" in a contract to avoid litigation.

Therefore, if I am a buyer, an example of my feasibility study contingency would be: "This contract is contingent upon a 2 week feasibility study to be completed on March 25, 2008." This gives me blanket coverage that for any reason I need to change my mind in the first two weeks, I can. If I want the house inspected by my neighbor, a building inspector, accountant, or my grandmother and I took their suggestion not to get it, I can get out of the deal within that two-week period.

Of course, remember it is all negotiable and the time period might be too long for the seller. In the end, I try to encourage a win, win situation for myself and the seller. You will have a better chance for a successful deal.

Tip 2

When you are in a buyer's market like today, the buyer is in control most of the time, because of the high inventory of homes on the market that the buyer may chose from. If a buyer needs to sell their house before they can buy the seller's home, they will most likely put this type of contingency in an addendum: "This contract is contingent upon the buyer selling his home." However, the seller would want you to put a time period of how long the buyer has to sell his home. Typically, the seller would come back and say, "The seller will give the buyer 24 hours for the first right of refusal." This is an option for the seller to get out of the contract if he has an acceptable offer while the buyer is trying to sell his home. The buyer has 24 hours to remove the contingency and continue with the contract. Again, it's up to negotiations to set time periods as to when something should be done.

However, in a seller's market, as we had prior to 2004-2005, a buyer would most likely not be able to use this contingency as easily because of fewer homes on the market and more buyers for the seller to chose from. A seller in this type of market would not want to take his home off the market while a buyer is trying to sell his home in a seller's market.

Whether you use a Realtor, sales agent, or do it yourself, try to always keep in mind that the result of a real estate contract should always be a "meeting of the minds."

Disclaimer: Please do your own due diligence regarding your state's real estate law or consult a real estate attorney.