Real Estate

These 8 Contingencies Can Ruin a Real Estate Deal

Real estate contracts are binding once both parties sign on the dotted line. But when contingencies are written into the contracts, one or both of the parties can walk away, scuttling the deal.
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It’s a Deal! Unless…

Buying a house is probably the biggest single investment you’ll ever make, so it’s a good idea to know exactly what you’re getting into before you’re on the hook for that mortgage. That’s why real estate agents add contingencies to sales contracts—to protect their clients, whether buyers or sellers, from getting a raw deal. But while the following eight common contingencies play an important role in protecting both buyers and sellers, they can also potentially ruin a real estate deal.

Contingent on Financing

After buyers make a written offer on a home, they usually have about two weeks to show proof of financial approval from a lender. If they can’t provide proof, the seller can walk away from the deal and start showing the house again. Getting preapproved helps ensure financing will be forthcoming, but it’s not unheard of for a bank to turn a buyer down at the last minute if, for instance, he loses his job. Additionally, if a buyer purchases an expensive item, such as a car, after having been preapproved, her monthly income-to-debt ratio could change, disqualifying her for a mortgage.

Related: 10 Real Estate Negotiation Tactics That Can Really Backfire

Contingent on Appraisal

If a sales contract is contingent on appraisal, the buyer can back out if a professional appraisal (by a certified appraiser) does not meet the seller’s asking price. This is an indication that the house is not worth what the seller thinks it is. A low appraisal might also cause the buyer’s lender to back out of underwriting the loan. If the buyer still wants the house despite the low appraisal, she may try negotiating a lower price with the seller. Fortunately, real estate agents usually perform a market analysis—an educated guesstimate of a home’s value—to protect against putting a house on the market at a price that is too high (or too low).

Contingent on Inspection

An inspection contingency protects both the buyer and the seller in the event that a home inspector discovers major problems, such as a faulty foundation. Some real estate sales contracts stipulate a set amount of money for repairs—maybe $2,000—to be evenly split between the buyer and seller if the inspection calls for repairs. If the required repairs exceed the set amount, the parties can renegotiate the contract, if desired, or either party can walk away.

Related: 10 Real Estate Costs That Are Always Negotiable

Contingent on Sale of Buyer’s Home

This contingency protects the buyer, but it can put the seller in a bad position. It’s understandable that a buyer would want to sell an existing home before buying a new one, but if the buyer’s home doesn’t sell for months, the sellers could miss out on selling their home to a different buyer. To protect the sellers, a listing agent will often add a clause to the contract that gives the buyers a deadline to either sell their existing home or get approval from a lender to buy the new home without first selling their old home. If the buyer doesn’t meet the deadline, the deal is void and the house goes back on the market.

Contingent on Seller Finding New House

This contingency protects sellers from having to move out until they have found a suitable replacement property. This one is rather rare, but if the sellers are looking to buy a house in a neighborhood with limited inventory, their agent might suggest this contingency to protect them from being forced to move out without having a place to move to. The agent for the buyer will often insist on a kick-out date. If the seller doesn’t find a new place to live by that date, the buyer can cancel the deal and start looking at other homes.

Contingent on Clear Title

Nearly all sales contracts are contingent on the house having a clear title. Things like a contractor filing a mechanic’s lien against the property’s title for nonpayment can prevent a house from selling, but the sellers may not even know there’s a problem with the title when they list their home. For this reason, most lenders insist on a title insurance policy as part of the loan’s closing costs. The title company will research the deed, and if there are any clouds (unresolved liens, claims, or judgments), the seller will have a chance to remedy them, or the deal will fall through.

Contingent on Insurance Approval

This contingency can be requested by the buyer or by the buyer’s lender when a home may prove difficult to insure. For example, if the home is located in a 100-year floodplain, the lender may not underwrite the loan until the buyer gets a commitment from an insurance agency to insure the home against flooding. Other areas where insurers are unwilling to insure a home include forested regions where fire risk is high, and unstable hillsides that are at risk of sliding. If the home can’t be insured, the buyer can back out.

Related: Experts Explain the Most Confusing Real Estate Terminology

Contingent on Final Walk-Through

Not all buyers take advantage of this contingency, but they should. Most sales contracts allow the buyers to go on a final walk-through of the home a day before (or the day of) the closing. Once all the papers are signed and the keys are in your hand, it’s too late to back out, so the walk-through gives you one last chance. If you open the door to what will soon be your new home and find out that a broken water pipe has flooded the floors or vandals have destroyed the walls, you can put the closing on hold until the seller (or the seller’s insurance agent) fixes the problems.