What Are Contingencies In Real Estate?

In the real estate world, there are plenty of buzzwords that may be unfamiliar to the average person. Some examples that we've previously explored include forbearance, earnest money, encumbrance and equity, among others. In many instances, real estate terms have meanings beyond their lay definitions. An example of this is the word "contingency." When used generally, Oxford Learner's Dictionaries define a contingency as "an event that may or may not happen." In the context of real estate, a contingency is a condition or action that a deal must include in order for the sales contract to become binding (via Investopedia).

As the financial concepts publication explains, a contingency will become part of a sales contract after the buyer and seller do two things. First, the buyer and seller must agree to the contract terms. Second, they must both sign the sales contract. As Investopedia detailed, when a contingency clause is included, it is critical that both the buyer and seller have a full understanding of the relevant requirements.

Typically, a contingency clause allows both parties to rescind or cancel a real estate contract in the instance of specific conditions negotiated by the buyer and seller. Rocket Mortgage notes that there are a few types of contingencies that you'll commonly see in real estate contracts. Three of the most common are appraisal, financing and inspector contingencies. Many times these are put in place to protect the buyer from a bad deal.

An appraisal contingency typically guarantees that a property will be assessed at a minimum value. If the property is not assessed at the agreed minimum value, the buyer can back out of the deal. A financing contingency, also called a mortgage contingency, provides buyers with a specified amount time to obtain their financing, in order to secure the purchase of the property. An inspector contingency, also called a due diligence contingency, gives buyers the right to have their home inspected before a sale is finalized. This allows buyers to cancel a sale or negotiate repairs based off of the findings of an inspector.