The condition is a clause in a real estate contract that renders the contract void if a certain event occurs. It can be considered as an escape clause that can be used under specific circumstances. It is sometimes also referred to as a condition.
How do conditions work in real estate contracts?
A purchase agreement between two parties may contain a number of conditions that must be met in order to complete the sale of the property. If any of the conditions are not met, the affected party can back out of the deal without any financial or legal repercussions.
Types of real estate conditions
There are many types of condition clauses in real estate deals, although some are more common than others.
Mortgage approval condition
The contract typically specifies that the deal will only be completed if the buyer’s loan is approved under terms and figures close to those mentioned in the contract. For example, if the contract specifies a down payment of 30% and a 30-year conventional loan, it must be approved by the lender. The type of loans, such as VA or FHA, may be specified in the contract. Loan terms may also be stipulated. For example, there may be a clause stating, “This contract is contingent upon the buyer successfully obtaining a mortgage loan with an interest rate not to exceed 6%.” This means that if rates suddenly rise, making financing at 6% unavailable, the contract will not be binding on either the buyer or the seller.
Insurance approval condition
The buyer does not want to complete the purchase if they are unable to obtain homeowners insurance, and certainly the deal will not be closed by the bank if the buyer cannot secure homeowners insurance. For this reason, most contracts include an insurance condition.
Appraisal condition
The appraisal condition allows the buyer to withdraw from the deal if the appraisal is lower than the sale price. If the appraisal is lower, it may be necessary to renegotiate to see if the seller will lower the price to make up the difference. In a seller’s market, the buyer may choose to waive the condition or pay the difference in cash, as the lender cannot provide a loan for more than the value of the home. If an agreement cannot be reached, the contract may be cancelled.
Closing date condition
The completion of the deal typically hinges on closing it on or before a specified date. Let’s say the buyer’s lender is having issues and is unable to provide mortgage funds by the closing date mentioned in the contract. Technically, the seller can back out, although the closing date is usually just extended. However, if the seller has another higher offer pending, they may want to enforce the condition, using it as a way to exit the current agreement and accept the better offer.
Inspection discoveries
Some real estate deals may be contingent upon the buyer accepting the property “as-is.” This is common in foreclosure deals where the property may have suffered some wear or neglect. There are typically various clauses related to inspections with specific due dates and requirements. These clauses allow the buyer to request new conditions or repairs if certain problems are discovered with the property – and to withdraw from the deal if they are not met. The seller can then accept or reject those conditions; rejecting them will also lead to the cancellation of the contract unless the buyer responds with a counteroffer.
Satisfactory inspection condition
There is often a clause stating that the deal will close only if the buyer is satisfied with a final walkthrough of the property (often the day before closing). This is to ensure that the property has not sustained any damage since the time of entering the contract, or to confirm that any repairs negotiated due to issues discovered in the inspection have been carried out.
Condition
Sale of Another Property
Sometimes, a buyer may only be able to complete the deal if they can get funds from selling their current home, which is typically under contract at the time they enter into the deal for the new home. Therefore, they make the new deal contingent upon the successful completion of their old place. A seller’s acceptance of this condition may depend on how confident they are in receiving other offers for their property.
Conclusion
It is natural for several conditions to arise in most real estate contracts and deals. Either the seller or the buyer can propose a condition regarding almost anything; it’s part of the bargaining and negotiation process. However, some conditions are more common than others and appear in almost every contract.
Frequently Asked Questions
Can a seller back out of a contingent offer?
It depends on the conditions present in the contract. One of the conditions that sellers prefer is the one that requires them to find another home to move into before completing the sale of their current house.
What is the seven-day contingency?
This contingency gives the buyer seven days to conduct a home inspection and negotiate any repairs or price adjustments with the seller. Each state has its own rules regarding the period of this contingency, so it’s a good idea to check with a real estate agent or a real estate attorney to understand the rules in your area.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Cornell Law School, “Contingency.”
Pulgini & Norton, LLP, “Contingent Insurance Conditions.”
National Association of Realtors, “December 2021 Realtors Confidence Index Survey.”
Texas Association of Professional Home Inspectors, “Home Inspection Survival Guide.”
Texas Real Estate Commission, “Adding Sale of Other Properties by Buyer to Contract Relating to Property in.”
Source: https://www.thebalancemoney.com/contingency-in-real-estate-2866368
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