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What are contingencies in real estate ?

by AEA Staff

A buyer’s agent is a type of real estate agent employed by buyers in the closing process to negotiate between the buying and the selling parties terms of the transaction.
Ignorance of the contingencies included in standard real estate contracts can be the underlying cause of many homeowner misunderstandings.
A contingency in a contract usually contains a time-limit that the condition or situation giving rise to the contingency must prevail.
Some contingencies include the buyer’s expression of an intention to continue along with a fixed time period in which the intention manifest.

A contingency in a contract usually contains a time-limit that the condition or situation giving rise to the contingency must prevail. Some contingencies include the buyer’s expression of and intention to continue along with a fixed time period in which the intention manifest.

What are the pros and cons of contingencies?

What are contingencies?

A contingency could be something that needs to happen before the deal makes sense or before something can be finalized.
A good way of looking at a contingency is a contingency is something that either happens or it doesn’t. When something has to happen before something is finalized, you’re bargaining with the possibility that it may or may not happen. If the contingency doesn’t happen, what does?

Pros:

  • A person who has negotiated in this way has more control over the next steps. There is more room for discussion and negotiation.
  • Contingencies can be a great negotiation tactic.
  • It also is way to get clarification on terms which might have been unclear.
  • You get to create a more equitable relationship with the person on the other side.

Cons:

  • There is potential for confrontation.
  • You might be setting more timeframes for oneself.
  • If the other side can be inflexible, a contingency may be a waste of time.
  • If all the contingencies are not met, you can jeopardize the progress you have made thus far.
  • If the contingency is too ambitious, you can come off as a bully.

What do contingencies protect against?

While people generally think contingencies are specifically meant to protect against environmental uncertainties, they can also protect against more common pitfalls of purchasing or renting a home.

For starters, when both the buyer and seller agree and sign on for contingencies, one could be to protect the sale or the buying of the property if the lender is disapproved for the buyer. Another could be the seller being unable to present a clear title for the property due to issues on it. Strike anything with a contingency from the contract and get a hefty fee from the seller who likely thought a contingency was simply a useless formality.

What types of contingencies are there?

Contingencies are popular when buying a home to negotiate even better terms for themselves. There are things like bids, inspections, surveys, and appraisals that a buyer and seller need to complete and either way, the other party will be working with the affirming result before it becomes official.

A bid is the highest price you are willing to spend on a property. Inspections and surveys confirm the physical state of the property and its adequacy for use, especially in areas that can really influence home value and the quality of life.
There are three inspections typically requested when purchasing a home:
Property inspections
Home inspections
Irrigation inspections

In appraisal, the appraiser will determine a property’s true market value using profits that both the seller and buyer could reasonably expect. This is a good way to measure the prospective return on investment, if it’s a rental property for you.

What is the difference between a deleveraging and a valuation contingency?

A valuation contingency is an agreement in a contract that will determine how much money a person who sells a stock will be paid if in the future the company has an assessment done that is less than what was thought when the stock was originally bought.

This type of exception typically arises if a company is entering into a period of trying to keep their debts under control.

A deleveraging contingency typically arises when a company is doing the opposite; when they are trying to bring in more investments in the company by trying to get rid of debt.

How do market contingencies and price contingencies work?

If you are the buyer of property there are many topics that you will want to get answers to before buying property. Questions about what your lender will allow, the status of the property, and if there are multiple offers on a listing are all fair game. If you are the seller of property, the buyer will have more questions. Do I need a co-signer on a loan? Where are utilities like gas, water, electricity, and trash? What are the dresscodes like?

There are many contingencies in the market that are used to protect both buyer and seller. Market contingencies are used to protect the buyer in the sense that if the property in some way falls below projections at the time of closing, the buyer will not go through with the deal but retain sole rights to get the same property at a different time. Price contingencies are used to protect the seller from the sense that if the buyer is not willing or able to pay the full asking price at the time of closing, then the property will not go through with the deal but the seller will retain the right to sell the property at a later time.

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