Blog Series: Contingencies – Providing Protection from Uncertainty

To recap: You’ve found an agent (or not).  You’ve found your dream home (hopefully).  You’ve got a signed Offer.  What could possibly go wrong?  Hopefully nothing. However, in the event the house isn’t as great as it looks, isn’t worth what you’ve offered, you can’t actually afford it, or your current house doesn’t sell, you need protection.  If you’ve done it right, that protection will be included in your Offer in the form of a contingency.

A contingency is a future event that might occur, but is not certain.  Essentially, it is a paragraph in your Offer to deal with the uncertainty.

Contingencies have three basic parts:

  1. The action necessary to satisfy the contingency;
  2. A deadline for the action to occur; and
  3. Consequences if the action does not occur.

A well-drafted contingency will clearly state each of these elements.  An example:

Buyer’s obligation to close this transaction are contingent upon Buyer closing on the sale of Buyer’s current home located at 100 Wilburn Road, Sun Prairie, Wisconsin by April 1, 2016.  If the sale does not close by April 1, 2016, Buyer may terminate this contract and Seller shall return to Buyer the earnest money.

As you can see, this clause sets forth the action required (closing), the deadline (April 1, 2016), and the consequences if that doesn’t occur (termination of the transaction and return of the earnest money to the Buyer).  The termination of the contract and a distribution of the earnest money is the most common consequence.  Please note, however, that buyers and sellers may together choose to extend an unmet deadline or waive any unsatisfied contingency.

The most common contingencies in residential real estate transactions are those for financing, appraisal, inspection, title, and closing.[1]  Each of these “standard” contingencies are located in the standard WB-11 form Offer.  Depending on the particulars of the transaction and real estate, additional standard contingencies may be necessary.  These may be included on an addendum to the form Offer.

Financing

The majority of residential real estate purchases will involve some sort of financing.  A financing contingency will set forth not only the basic loan terms (amount, interest rate, payment amount, term, etc.), but also the type of loan.  A financing contingency is satisfied when a buyer provides the seller with a loan commitment for a loan meeting the terms set forth in the Offer.

Inspections

Unless you are intimately familiar with the home you are purchasing (and even if you are), an inspection by a licensed inspector is a vital part of any transaction.  It will inform you of the current condition and any defects in the house you are purchasing.  If defects are found, the inspection contingency will state whether the Seller will be allowed to fix – or cure – the defects at his/her expense.  If so, the Seller will have an agreed-upon time period to make any required repairs.  If not, the Buyer may often terminate the Offer and walk away.  The most frequent disputes regarding inspection contingencies involve who will actually conduct the repairs (we recommend a licensed professional), and whether the defects were sufficiently cured.

Appraisal

An appraisal is a valuation of the real estate (actual land, the home, and any other improvements) you are purchasing.  An appraisal contingency will require that the valuation be at least the amount of the purchase price.  If the appraisal comes back below the purchase price, the Buyer will typically have a right to terminate the Offer.  In some cases, rather than lose the transaction, parties may agree to decrease the purchase price accordingly.  If, on the other hand, the appraisal comes back higher than the purchase price, the contingency is simply satisfied and no action or modification of the transaction is necessary.

Title

When you are buying real estate, you will want to ensure that you are receiving “merchantable title.”  This means there are not unexpected easements, judgments or other liens, or other encumbrances which would prevent you from fully enjoying what you have purchased.  In order to satisfy this contingency, the Seller provides the buyer with a title insurance policy showing that there are no unacceptable encumbrances on the title.  If there are issues, the Sellers may have to work to remove them from title (e.g., by paying off old judgments or drafting or removing easements)

Closing

As the name implies, a closing contingency will set a deadline for the transaction to close.  It will also state the place the closing is to occur; most often occur at the office of the issuer of the title insurance policy.

Conclusion

As stated above, this is by no means an exhaustive list of the possible or appropriate contingencies for any particular real estate transaction.  In order to determine which contingencies are appropriate for your transaction, we strongly recommend you meet with an experienced real estate attorney.  If you would like to meet with one of our experienced real estate attorneys, please contact us at (608) 837-7386.

Disclaimer:  Please note that reading and/or commenting on this blog post does not create an attorney-client relationship with Eustice, Laffey, Sebranek & Auby, S.C. absent an express agreement between the firm and the client.  Contacting Eustice, Laffey, Sebranek & Auby, S.C. or any of its attorneys or employees via this website or via email does not create an attorney-client relationship.

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[1] Note: This list is by no means exhaustive.  Entire books are written about contingencies for use by real estate lawyers in residential real estate transactions.

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