Real Estate Contingencies

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay out ahead it.
Contingency clauses are very important to your real estate contract. They provide protection like a suit of armor. Here’s how to use them.

A Beginner’s Guide to Contingency Clauses

A contingency clause says that your purchase is contingent on a number of conditions specified.
So, if like my friend Randy, you insist on having a complete roof repair and rodent inspection, you are going to write those contingencies into your contract. If you buy property and find that Ratatouille is cooking pasta in a kitchen full with water up to your ankles, then you haven’t been careful about your contingencies.
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.

Other Information to Keep In Mind About Contingencies

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: You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the word processor as well.
Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure that you are communicating via whatever format is required by the contract and its contingencies. 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. 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 Randy purchased his fishing business, the wharf on the property had to be completely replaced. Randy wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, and 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. Contact Royal Legal solutions for help with contingencies, or any of your other investing needs. Set up your personalized real estate consultation in minutes with our online tool.

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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