Whether you are buying a starter home, moving to a larger residence or downsizing, the purchase or sale of a home is likely one of the biggest financial transactions a person will make. Therefore, it is important that buyers and sellers understand all the terms of their home purchase contracts, including any possible contingency clauses contained therein.
What is a contingency clause?
A contingency clause defines some sort of action that must be taken or condition that must be met before the purchase contract can be considered binding. If the terms of the contingency clause are not met, the parties to the purchase contract can walk away from the deal.
Some common types of contingency clauses
One type of contingency clause is an appraisal clause. In an appraisal clause, the property is appraised by the bank, and per the clause the buyer can walk away if the seller will not accept the appraised price. A financing contingency gives the buyer the time necessary to secure a mortgage. An inspection contingency states that the home must be inspected within a specific time period. If this does not happen, the buyer can walk away. These are only some common types of contingency clauses in a residential purchase contract.
Making a contract binding
While the failure to meet a contingency clause makes a residential purchase contract void, if the contingencies are met, the purchase contract becomes legally enforceable. Once the contract is enforceable, a party that tries to back out will have breached that contract. To avoid confusion, it is essential that any contingencies be in writing and included in the purchase contract. Contingencies protect the parties who want certain conditions met before fully signing off on the deal.