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What Buyers Need to Know About Contingency Periods (And How Contingency Periods Benefit Them)

What is the contingency period, and why should buyers care about it? This contract stipulation is often a benefit to homebuyers. Here’s what you need to know. —-

You’ve found the house of your dreams, your offer has been accepted, and you’re ready and eager to reach the closing table. But first, you have to sell your old home, potentially secure financing, and secure a home appraisal (and likely an inspection) on your new house. Your to-do list is growing by the second, and you’re not sure how to keep track of everything that needs to be accomplished.

No worries — these are all normal parts of the process! Most purchase agreements have some terms in place that must be met for the deal to go through, such as having a home inspection completed. These are called contingencies, and they’re very common in a real estate sales contract.

“They’re basically in every purchase agreement,” says Rick Ruiz, a top real estate agent in Las Vegas, Nevada, who completes 15% more sales than the average Las Vegas. He explains that contingencies are already built in, so they’re typically part of the real estate contract.

They may be common, but they’re often misunderstood. What’s the point of a contingency, and how long can a contingency period last? Do contingencies benefit homebuyers? Using extensive research and expert opinions, let’s dig into the answers.

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What is a contingency period?

A contingency is a clause in a real estate contract upon which the deal depends. In other words, if the terms of the contingency aren’t met, either or both parties involved have the right to back out of the agreement, and the deal can be called off.

“Contingencies are good for protecting the interests of the parties involved in a property sale,” says Eric N. Klein, a real estate attorney and president of Klein Law Group. “They are a means for keeping everyone honest about the issues related to what is the largest purchase most people will ever make.”

For example, it’s not unheard-of for a buyer to have a home sale contingency in place when they already own a home and are looking to buy a new one. The terms would typically state that for them to buy the new home, they have to first sell the old one. If they can’t sell their old home, the deal would likely fall through to protect the buyer from having to pay two mortgages. Because the home sale contingency is in the contract from the beginning, there would likely be no legal repercussions for the buyer backing out in this situation.

A contingency period is the amount of time a certain contingency has to be met. In the above example, the buyer doesn’t have an infinite amount of time to sell their existing home. This would be unfair to the seller because they likely don’t want to wait a long time for their house to sell, especially if there are other interested parties who can close sooner.

How long is a contingency period?

The timing for contingency periods can vary, but it’s not uncommon for a contingency period to last between 10 and 60 days. In some cases, the contingency period could be shorter.

The timing for these periods typically starts the moment the contract is accepted. This gives both buyers and sellers a timeframe for when certain steps need to be resolved during the process. If a contingency isn’t met during the contingency period, then the contract can be broken.

The length of the contingency period and the contingency itself can benefit either the seller or the buyer, depending on the type of contingency.

A seller waiting on a home sale contingency could get out of the contract and do business with other individuals if the buyer doesn’t sell their existing home during the contingency period. However, a buyer can also be protected by contingencies.

Let’s look at common types of real estate contingencies and see how certain ones might benefit the buyer.

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Common real estate contingencies

Homebuyers and sellers can agree on any number of contingencies to include in their contract. However, you’re likely to see a few types of contingencies on a more regular basis.

Appraisal contingency

The appraisal contingency is put in place to protect the buyer from borrowing more money than the home is worth.

A home appraisal is a professional assessment of the value of a home by a licensed appraiser. In a nutshell, it’s the professional opinion of someone who’s been trained to appraise home values for a living. Unfortunately, because it’s an opinion, this means the appraised value could change depending on the appraiser.

As a homebuyer, you typically want your potential home’s appraised value to be at or above the purchase price. This way you know you’re not overpaying for the house and should be able to make your money back if you end up in a situation where you have to sell the home soon after buying it.

An appraisal contingency protects the buyer because it allows you to back out from the contract if the appraised value doesn’t meet the agreed purchase price. A lender will only loan money up to the appraised value, which means if the appraisal turns out lower than the agreed-upon price, you might not have the financing to continue the purchase unless you can come up with some extra cash or get the seller to lower the price.

According to Ruiz, the average timeframe for an appraisal contingency in his area is 17 to 20 days.

Financing contingency

A financing contingency, sometimes called a mortgage contingency, is put into place to give the buyer time to secure financing for their home purchase. This sets a timeframe for the buyer to apply for loans and obtain the money they need to continue buying a house.

Depending on the terms of the financing contingency, both the buyer and seller could retain certain protections. In some cases, a buyer might be able to back out of their agreement if they weren’t able to secure financing. They might have terms that say they will receive their earnest money deposit back without any negative consequences.

But in other cases, a seller could be protected because the terms were specific that the buyer would have to secure financing during the allotted time, or the buyer’s earnest money would be forfeit. A financing contingency might last between 30 and 60 days.

Home sale contingency

Many buyers often have home sale contingencies because they’re trying to sell their existing home to be able to purchase another home. This contingency means the purchase of the new home is contingent on the existing home selling first. In most cases, this contingency is in place because the buyer won’t be able to afford the new home unless they can liquidate some assets by selling their old home.

A home sale contingency protects the buyer because they won’t be obligated to purchase the new house if their old one doesn’t sell. It also protects the seller because they don’t have to wait eternally for the buyer’s existing home to sell.

If the contingency period ends without the buyer having sold their existing home, the seller can find other interested parties. This type of contingency can last between 30 and 90 days.

Inspection contingency

A home inspection typically involves an inspector taking a look at different parts of the house, which includes the foundation, grounds, basement, roof, attic, home systems, and more. Once the inspection is done, the buyer receives a report about what was found.

An inspection contingency allows the buyer to have a home inspected during a certain contingency period. This could be within a timeframe of five to seven days, though it depends on the agreement between buyer and seller. The inspection contingency also allows the buyer to back out of the deal without forfeiting their earnest money if the inspection turns up significant issues (and that’s typically left up to the buyer to determine and define).

If the report shows some possible problems with the house, the buyer could potentially back out of the deal or renegotiate a price drop or repair credit with the seller — which could prompt further inspections.

Kick-out clause

A kick-out clause is a contingency used by sellers to give them protection against a home sale contingency. The kick-out clause often allows the seller to continue to market their property even if they’ve entered an agreement with a buyer who has a home sale contingency in place.

If the seller gets a better offer, they can give the current buyer a certain amount of time (typically around 72 hours) to either remove their home sale contingency from the contract or to back out of the purchase agreement entirely. In many cases, the buyer may have only a few days to respond to the seller.

As a buyer with a home sale contingency, you’d likely want to move as quickly as possible to sell your existing home and proceed with your new home purchase. This is especially true if a seller inserts a kick-out clause into the contract. Otherwise, you might run out of time to seal the deal before your contingency period expires as the seller could potentially consider and accept another offer without a sales contingency.

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What ends a contingency period?

A contingency typically ends at the conclusion of its stated timeframe, or when a buyer or seller has complied with certain terms and conditions. But in specific locations, namely California, buyers have to submit a contingency removal form by the contingency removal date if they want to proceed with the purchase.

If a contingency removal form isn’t submitted on time, the seller can potentially cancel the contract they have with the buyer. But before a seller can cancel, they have to submit a form to the buyer — called a notice to the buyer to perform — to let them know they have a few days (or fewer) to either back out of the agreement or remove the noted contingencies and continue with the sale.

In general, “contingencies can be removed through the negotiations process, by proof of compliance, or by the passage of deadlines,” says Klein.

Keeping track of contingencies can be stressful, especially if you’re a new homebuyer. Fortunately, real estate agents know the ins and outs of confusing jargon and specific timelines — which means less of a hassle for you. To get the help you need, find a top agent today.

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