Real Estate Contingencies: A Beginner's Guide

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay ahead of it.

Real estate contingencies are an important part of your real estate contract. They provide protection like a suit of armor. Here’s how to use them.

What Are Real Estate Contingencies?

A contingency clause says that your purchase is contingent on a number of conditions specified.

So, if the buyer insists on having a complete roof repair and rodent inspection, they are going to write those contingencies into the contract. If they buy the property and find mice playing in the halls and the shingles falling from the eaves, the contingencies haven't been honored.

These are a few of the contingencies you might want to consider in a purchase agreement.

#1 Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

#2 Financing Contingency

The purchase in contingent on the buyer obtaining financing terms acceptable to a the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

#3 Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

More About Contingency Clauses

#1 Earnest Money

Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

#2 Don’t Miss Deadlines

These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses, haul out your contingency and drop it on the table like a hot mic.

#3 Get it in Writing

Make sure that you are communicating via whatever format is required by the contract and its contingencies. You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the printer is mightier than the screen.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure everything is in writing and sent to the seller on a date that can be tracked.

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Real Estate Contingencies Protect Your Ass

Don’t get caught with your pants down. Contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world.

Real estate buyers should always use contingency clauses. Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

When a friend purchased his fishing business, the wharf on the property had to be completely replaced. My friend wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your contingencies right, you should be able to open for business the day your receive the deed to the property.

Keep your pants up when you purchase real estate. Start with our investor quiz and we'll help with contingencies or any of your other investing needs. 

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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