Visualize this scenario: After previewing several houses with your real estate agent, you’ve finally found the perfect house. A real estate contract has been drawn up and signed by you (the buyer) and the seller. But alas! You encountered a problem – your mortgage application was disapproved. Can you still get out of the real estate contract? Worry not. Generally, real estate contracts contain contingency provisions which state under what situations the buyer/seller can terminate the contract.
A real estate contract is a legally binding contract for the purchase/sale of real estate between two parties. It varies depending on the type of property being purchased or sold, its location and on whether the contract is a reprinted form furnished by a realtor or one prepared by a lawyer. While the form may be different, essential information include the names of the parties, legal description of the property, purchase price, down payment, terms of payment if not cash and the closing date. In addition, both parties may insert contingency clauses. A contingency is simply a way in which a buyer/seller can back out of a contract within a set period of time if certain conditions specified are not addressed or met satisfactorily.
Most real estate contracts contain financing/mortgage contingency which stipulates that the purchase is conditional on the buyer’s ability to obtain a mortgage commitment within a prescribed timeframe. Inability to do so gives both parties the legal right to terminate the contract. In this case, the buyer’s deposit is also refunded.
An inspection contingency allows the buyer to conduct thorough inspection of the property. If the seller is unwilling or unable to repair defects or not agreeable to reduce the asking price to help compensate for the cost of the repairs; then both parties can opt to cancel the contract all within the time guidelines set forth in the contract.
A contract can also be contingent on the sale of another property. If the property is not disposed within a specified period of time, the buyer can be relieved of the contract.
A real estate contract usually provides a title and survey review period for the buyer. The buyer gives notice in writing of any fault or flaw noted in the title documents. If the defects cannot be remedied, the buyer has the right to cancel the contract. In the same way, the buyer can also conduct a property survey. If there are structural problems or if there are encroachments on the property, the buyer may also choose to rescind the contract.
Some states require sellers to disclose in writing to buyers any known defects of the property. Any late disclosure gives the buyer the option to terminate the contract within a prescribed period after receipt of the disclosure.
The abovementioned are some of the standard contingencies written into almost all real estate contracts. However, both parties can also add other escape clauses such as a contract contingent on septic tank inspection, home appraisal or the approval of other family members if the property is part of an estate sale.
In a nutshell, buyers and sellers do not enter into real estate contracts with the intention of getting out of them. However, sometimes things do not proceed as expected. Both parties can then turn to the terms and conditions stipulated in the contract to terminate the deal. A word of caution: If a contingency date lapses, either party loses the benefit and protection of the contingency.