financing

Contingencies: Providing Protection from Uncertainty

This gallery contains 1 photo.

So you’ve decided on a property.  It looks great. You think you can afford it.  And you are closing on your current home soon.  What could possibly go wrong?  Hopefully nothing. However, in the event the house isn’t as great as it looks, you can’t actually afford it, or your current house doesn’t sell, your Offer should address what happens.

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.

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 March 30, 2014.  If the sale does not close by March 30, 2014, Buyer may terminate this contract and Seller shall return the earnest money.

As set forth above, there are consequences if the contingency is not satisfied on or before the deadline.  A well-drafted contingency will clearly state these consequences so that everyone is aware ahead of the deadline.  Most often, the consequences involve the termination of the contract and a distribution of the earnest money.  A buyer or seller can always choose to waive any unsatisfied contingency.

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

Financing

Most 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, 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 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 provide whether the Seller will be allowed to fix – or cure – the defects.  If so, the seller will have an agreed upon time to make any required repairs.  Disputes regarding inspection contingencies often arise as to who will actually conduct the repairs, and whether the defects were sufficiently cured.

Appraisal

An appraisal is a valuation of the real estate you are purchasing.  An appraisal contingency will require that the valuation state the home is worth 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, however, the appraisal comes back higher than the purchase price, the contingency is simply satisfied and no action 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 preventing you from fully enjoying the real estate.  In order to satisfy this contingency, the seller will have to provide the buyer with a title insurance policy showing either (1) there are no issues on the title; or (2) if there are, they will be taken care of on or before the closing.

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.


[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.