A contingency is a clause in an agreement that protects sellers whenever a buyer is unable to complete the purchase.
For example, a buyer may need to sell their home to fund a down payment. What if they can't? A buyer also may not be able to get a mortgage prior to closing. What happens then?
In either case, the seller would need to legally void the purchase agreement and extinguish a buyer's right to complete the sale so that the home can go back on the market.
But getting an order from a court official nullifying the sale is expensive and takes time. Instead, sellers can include contingency clauses that let them walk away from the sale without having to go to the courthouse.
Contingencies are commonly used in real estate contracts, and agents should be familiar with them. Here's what you should know about them.
Contingencies frequently used by sellers
A purchase agreement between a seller and buyer is usually a pre-written form that has clauses covering contingencies. It's a good idea to review it and make sure that it addresses your concerns. Meeting with an agent is a great way to cut through the legalese and explain any confusing terms.
- Financing contingency: Sets a deadline before closing for a buyer to secure final approval of financing from a mortgage lender
- Liquidated damages clause: States that an earnest money deposit goes to seller if a buyer fails to close on the house
- Kick-out clause: Allows sellers to continue marketing their home if a buyer fails to get a mortgage loan
- Closing date: If a buyer can't close on a house by a certain date, the sales agreement is void
- Title contingency: Makes the sale contingent on the property having no liens or ownership disputes
- Homeowner association review window: The buyer has a set number of days to review any homeowner's association regulations
- Appraisal clause: Buyer covers any shortfall if appraisal is low
- Home sale contingency: Allows sellers to back out of a contract if they can't find a new home
- Inspection deadline: Buyer has a set number of days to conduct an inspection of the home
Pro tip: Require a buyer to verify proof of funds or a mortgage pre-approval when they place an offer.
Additional protections
You may want to consider these additional measures:
- Rent-back agreement (optional): Allows the seller to rent their home after closing in case they cannot complete sale on their new home
- Commission protection clause: States that a seller is not liable for the buyer's payment of the commission in case contract falls apart
- Monitor buyer’s compliance with deadlines
- Keep backup offers active if possible
Pro tip: Determine the earnest money deposit you will ask a buyer to provide and ensure it is held in a secure bank account.
What sellers can do if a contingency isn't met
If a buyer fails to meet a contingency, the purchase agreement isn't necessarily dead. Almost everything is negotiable between a buyer and seller. Think ahead about what you can compromise on during negotiations with the buyer, so you get what you want from the deal.
- Consider extending a deadline for the buyer to get a mortgage
- Postpone the closing date to give the buyer more time to meet the terms of the agreement
- Give a buyer an extension to read a homeowner's association agreement when it is long and the buyer would feel more comfortable spending more time analyzing it
- If an appraisal is less than the sales price of the home, consider splitting the difference with the buyer
- Extend the time that a buyer has to sell their home
- Extend a deadline to fix issues that came up during the buyer's home inspection