Have you heard about purchase agreement contingencies?
If you’re getting ready to buy a property, they’re likely to be brought up at some point.
Purchase agreement contingencies are conditions or actions that must be met for a real estate contract to become binding.
However, they can serve as a double-edged sword.
On the one hand, they’re a good way for buyers to anticipate unforeseen events and have a good legal way to back out of a transaction.
That said, having a bunch of contingencies included with your offer can often make it less appealing to a seller in a hot market.
So, depending on the situation you’re in, you should consider using purchase agreement contingencies wisely.
Read on to learn more!
1. What is a purchase agreement?
A purchase agreement, also known as a purchase and sale agreement, is a type of legally binding contract that outlines the various conditions that both buyers and sellers must abide by or complete for the sale of real property.
These types of agreements are often specifically associated with the sale and purchase of real property by a selected closing date.
A proper purchase agreement should include all relevant information to the deal, such as the buyer and sellers’ information, the price of the property, and the terms on which the sale is contingent, etc.
All real estate contracts must be clearly written to prevent misunderstandings relating to various purchase agreement contingencies, terms, and/or concessions.
2. What does contingent mean in real estate?
In real estate, the term contingent means that the seller has accepted an offer to purchase the property, but for the real estate transaction to be completed, the buyer must meet or bring to fruition whatever terms or “contingencies” have been negotiated within the contract.
Some examples include:
The house passing the appraisal
The buyer securing financing for the deal
And many more!
When this occurs, the listing will still be actively up until the buyer satisfies this contingency and money changes hand with the title company or escrow, and thus the real estate transaction is completed.
3. What are purchase agreement contingencies?
In short, purchase agreement contingencies are conditions or actions that must be met for a real estate contract to become binding.
A contingency becomes part of a binding sale contract when both parties (the buyer and seller) agree to the terms and sign the contract.
There are various types of contingencies that impact purchase agreements.
4. What are the various levels of contingencies in real estate?
When an offer is accepted in real estate and there are contingencies involved, the property listing status will change to contingent.
Once all contingencies have been met, the status will change from contingent to pending.
However, even if an offer has been accepted, there’s still a chance that the closing will fall through.
Here are the levels of contingencies in real estate, so you can get a feel for the different conditions.
Contingent – Continue to Show: The seller has accepted a deal that depends upon one or numerous contingencies.
At this point, the purchaser will still be working to clear up those contingencies, and various other buyers can view the residential or commercial property and submit deals.
Contingent – No Show/Without Kick-out: In this case, the seller has accepted a deal with contingencies, but they will no longer be showing the home to other buyers or accepting offers.
Contingent – Release/Kick-out: In this scenario, there’s a target date by which the purchase should meet its contingencies.
That said, the seller is going to show their home and continue to approve additional bids.
5. What are common real estate contingencies?
There are a set of common purchase agreement contingencies that will impact whether a contract becomes binding.
There’s no limit to how many purchase contingencies you can put into your sales contract or purchase agreement.
A buyer or seller could attach as many real estate contingencies as desired.
It’s a legal right to include them; however, it may make the other party less inclined to accept the offer.
Inspection contingencies: Of all the purchase agreement contingencies, this tops the list.
Property inspections give buyers a legal “out” if they are unhappy with the results of a particular inspection.
There could be minor deficiencies (think a leaky faucet) or more severe deficiencies (major foundation crack).
Either way, having this contingency in the contract gives you the flexibility to back out of the deal if you’re not comfortable with something uncovered during the inspection.
If nothing else, make sure you include this one!
Mortgage contingencies: One of the common purchase agreement contingencies is related to financing.
Most home buyers use mortgage loans to cover the cost of their purchase (or at least a significant chunk of it).
The problem with this is that mortgages can fall through somewhere between the purchase agreement and the final closing.
Even if the buyer gets pre-approved for a loan and makes an offer that the seller accepts, the mortgage lender’s underwriter can find a problem with the application and ultimately deny the loan.
If this happens, then the buyer would want to find a way out of the purchase contract.
Sale of current home: If this provision is present in the contract, then it makes the sale contingent upon the successful sale of the buyer’s current home.
That is, if the buyer is unable to sell his/her current property, then they have a legal way out of the purchase contract.
As a result, sellers are often reluctant to accept this offer and might only do so as a last resort.
In a competitive market where buyers are competing for limited inventory, this type of purchase contract contingency can actually work against the buyer.
However, in a slower market, sellers could be inclined to accept such an offer.
Appraisal: Lenders use appraisals to ensure that the property being purchased is worth the amount that the buyer has agreed to pay.
However, if the property is appraised for less than the purchase price, then an appraisal contingency gives you a chance to renegotiate the purchase price to reflect the appraisal or back out of the deal entirely.
Title contingencies: A title is a legal document that details the official history of ownership by showing who has owned a property in the past as well as who currently owns it.
During the buying process, a title company will check the title to ensure that it’s “clear” of liens, disputes, or other issues.
While some title issues can be resolved between the purchase agreement and the final closing, others are more problematic.
Any title contingencies can give a buyer a way out of the contract if the issues are unresolvable.
6. What are the nine key parts of a purchase agreement?
Each purchase agreement is a custom document that depends on your individual situation.
Your agent will typically assist you with completing the agreement along with its detail and protections.
While some buyers are tempted to prepare the purchase agreement without a real estate agent, this isn’t recommended.
If you’re not working with a real estate agent, hire an attorney.
This will help protect you during the process if nothing else.
Here are the various elements of a purchase agreement that you should be aware of.
Price: Price covers the property itself and any fixtures within existing improvements (if applicable).
A fixture is anything permanently attached to the building or land (i.e., ceiling fans or fences).
You can also extend this to cover additional items like a washer and dryer if you wish to.
If your offer is lower than the seller’s asking price, then you’ll need to explain why.
This could be because the roof needs to be replaced or the air conditioning units will require replacement in the next year.
Earnest money: Earnest money is a deposit in the form of a check or money order that’s normally 1 percent of the purchase price.
It shows the seller that you’re serious about buying the property.
If the seller rejects your offer, you’ll get your deposit back.
However, if they accept it, then it will be applied to the price when you close.
Before the offer is accepted or rejected, the escrow agent will hold the money in escrow.
If you (the buyer) back out, then the seller will keep the money.
Don’t put this money down lightly!
It’s a sign that you’re serious about making the purchase, and while it’s “only” 1 percent, it can be even more in a hot market.
Costs: One of the sections in the purchase agreement is who pays for the closing costs and inspections.
If it’s a buyer’s market, sellers will sometimes offer to pay for closing costs.
If it’s a seller’s market, buyers will have to pay.
Either way, buyers will usually pay for the professional inspections that they want to have done.
Timeline: A purchase agreement always specifies how long the seller has to respond to your offer and when you’d like to close.
Normally, buyers give sellers three to five days to respond to their offer.
However, in a hot market, there are often even shorter windows, so there’s less of a chance for other buyers to step in and outbid you.
In terms of a closing date, it is usually 30 to 60 days from the date the purchase agreement is finalized.
This may sound like a long time, but it’s often used for inspections, final approval for your loan, and the title review.
If any repairs are a condition to the sale, then the seller will need to get them done.
Property description: This section in the purchase agreement includes the street address, legal description of the property, and anything that’s not clearly a fixture that you expect the seller to leave: appliances, blinds, etc.
Furthermore, if you’re purchasing a property not served by public water and sewer systems, the well and the septic system must be described here.
Contingency addendum: Here’s where you’ll find what this entire article is focused on: purchase agreement contingencies!
A contingency addendum allows you to cancel the purchase agreement AND receive your earnest money back under certain conditions.
It’s rare to make an offer with zero contingencies because buyers want to protect themselves.
That said, too many can turn sellers off.
Financing: In this section, a buyer will state how they’ll pay for the property.
For most, this will be a mortgage loan.
The purchase agreement will be contingent on your lender’s final approval of your loan.
Property inspections: Do you plan to do professional home and property inspections?
This is a yes for almost every buyer buying a home because it’s risky to buy a property without at least a general inspection.
Look for an inspector you trust so that you can move fast once your offer is inspected.
Property taxes: Have you ever thought about how property taxes, utilities, or other expenses would be handled if you took possession of someone else’s property during the middle of a year or month?
This can get complicated when it isn’t spelled out in a purchase agreement.
Depending on what you work on, the seller might have to pay a prorated share, or you might have to reimburse them.
Furthermore, the seller must tell you whether they’ve gotten any notices about future tax assessments or increases.
7. What happens after you submit your offer in a purchase agreement?
As a buyer, you may wonder what happens after you submit your offer.
Waiting isn’t fun when you’re wondering whether you’ll get your dream property or not.
At the very least, the seller has a deadline, and there are only three potential outcomes that you have to wait on.
Your offer is accepted: Hooray! This is the best-case scenario.
The seller will sign the purchase agreement, which becomes a legally binding contract.
Your agent should receive a signed copy, and you should notify your lender ASAP.
Next, schedule your professional inspections to get the purchase agreement contingencies out of the way.
Your seller makes a counteroffer: If the seller isn’t satisfied with some part of the purchase agreement, then they may choose to counter your offer.
It could be money, the closing date, or some element in the contingencies that they want to be removed.
You can either accept these new terms or counter them again.
Keep in mind that every counteroffer and agreement should be in writing and through your agent.
The back and forth can go on for as long as both parties want.
It’s worth noting that if the home is inspected and something that merits a price reduction, then the negotiation may need to be reopened.
Your offer is rejected: The seller may flat out reject the purchase agreement that you have offered them.
This is likely because they received a better offer from someone else.
If this is the case, move on and discuss your strategy with your agent.
For instance, do you need to be more aggressive?
Are you requesting too many purchase agreement contingencies?
An experienced agent will help you work through this process with their experience in mind.
Final thoughts
When the market is hot, purchase agreement contingencies are often thrown to the wayside by many buyers in their attempt to win the bid.
However, this is risky, and while it’s favorable to sellers, having a few scenarios in which you can back out of a contract is best for both parties.
Additional Resources
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.