Contingent and Contingencies

The term contingent comes up a lot in real estate.  Buyers looking at web sites see the term connected with a listing and they wonder what contingent means. Buyers entering into a contract hear their agents talking about contingent this and contingent that and a certain amount of confusion sets in.

Think of it this way. Your uncle can come to your wedding if and only if

  1. he agrees not to drink
  2. he agrees not to kiss all the bridesmaids
  3. he doesn’t argue politics with your dad
  4. he leaves at 10 pm

Those are contingencies…

Now that we know that a contingency is just a “if and only if” clause, we can talk about real estate.

A contingent sale comes up in a lot of discussions from visitors to web sites. They really like a house online and when they call about it I often have to tell them the house is “contingent”. That means another buyer already has a contract to buy the house, but is working through a list like your Uncle coming to the wedding. Instead of uncles drinking and carousing, the issues are physical inspections, obtaining  financing, getting clear title, and having the house successfully appraised. If they approve everything, the sale goes ahead. If they disapprove of any of their contingencies, the house will go back on the market.

When a buyer writes their purchase agreement they choose options which state that the agreement is dependent on specific events such as approval of a building inspection, delivery of marketable title, obtaining acceptable financing or mortgage commitments, and having a suitable appraisal. Contingencies are key to the due diligence phase of your house purchase. They give you the chance to be certain the property under contract is fully satisfactory to you. If you don’t approve of any of the contingencies, you can cancel the contract and get a full refund of your deposit. On the other hand, once contingencies have been removed, you cannot back out of the transaction without incurring the penalty known as liquidated damages.  It’s necessary for all contingencies to be removed before the closing can take place.

Contingencies are as flexible as the parties to the contract want them to be. Very often, a sale is dependent on another house closing escrow. Sometimes the seller has to locate a suitable replacement home before the sale will continue. Often the building condition is a factor and a contingency plays an important role in approving a physical inspection, a well inspection, or a septic inspection. The real estate industry today thrives on disclosure and inspections, so it would not be unusual for a half dozen or more physical inspections to be included as contingencies.

Country properties typically have a longer period of time for due diligence just to handle the extra inspections required on more complex acreage. In Sonoma County some permissions for well and septic have to be done during the right time of the year (for dry or wet weather, respectively) and a contingency period may extend to include testing during those time periods.

Often, contract negotiations revolve around contingencies more than price. Sellers are usually eager to move on to their next life adventure. Buyers, on the other hand, want as much time as they can get to hold onto their money while they check out the property in detail. Sellers are understandably reluctant to make a property switch from “active” to “contingent” in the MLS if they think the buyers are just kicking tires.  Typically, negotiations for contingencies revolve around timelines. Every contingency has a specified amount of time to be approved and the approvals should be validated in writing by both parties.

So, the next time you hear contingent or contingencies, think of your uncle at the wedding. Then think of him inspecting your roof. Now you know.