Contingencies are a common and necessary part of today’s real estate contracts. Contingencies are clauses that allow for the “what ifs” – unknown future events to be addressed at the time the contract is written.
Colorado Contracts to Buy and Sell Real Estate have several contingencies printed on the form. Others can be added by the parties involved to address specific situations. Most of these clauses state that if the contingency is not met, approved, or agreed upon, the contract will terminate.
Contingencies are actually a protection to all parties involved in the contract. The wording is very important and is usually done so that a specific action must be taken in order to terminate the contract. No action often eliminates the contingency.
Loan approval is a very common contingency. Contracts typically state that if loan approval is not obtained by a certain date, the contract terminates. This protects purchasers from losing their earnest money deposit in the event they cannot obtain financing, or if interest rates or points change beyond the limits set forth in the contract.
Inspections are other items of major importance to purchasers, and are important for protection of the seller, as well. A contingency in this area requires the seller to provide the purchaser with a disclosure statement and gives the purchaser the opportunity to perform inspection on the property. If notice is given to the seller by a specific date, the parties can agree to repairs or changes. The contract terminates if no agreement is reached. This section of the contract protects the purchaser by providing an opportunity to do inspections for major problems. It protects sellers by not requiring them to perform any repairs or adjustments they do not want to, while allowing buyers to see up front all aspects of the property.
The pre printed portion of the newest real estate contracts also contain contingencies regarding the appraisal of the property and title documents. If the appraisal section is chosen to apply, the contract is then contingent upon the property being appraised for at least the purchase price, or the buyer will have the option of renegotiating or terminating the sale. The title review section of the purchase contract gives the buyer the right to review and approve of limitations to the title of the property.
Other common contingencies include those for the sale of another home, zoning changes, permits, and land use changes. These items are not pre printed in the contract, but may be included at the request of the purchaser.
In any contract, all parties involved must agree to the contingencies. A seller is unlikely to accept a contract with unreasonable or too many contingencies (especially in today’s market), just as a purchaser probably would not commit to a contract without any protection. Regardless of what contingencies or clauses there are in the contract, the most important factor is to make sure all parties to the contract understand everything. Ask questions of your Realtor, and/or get legal advice from an attorney. The bottom line is, do not sign until you completely understand what you are agreeing to.