What Does Contingent Mean In Real Estate?
Hey, good morning, Jeb Smith here Coldwell Banker Residential Brokerage in Huntington Beach. Today I want to talk about contingencies. What is a contingency? That’s something that I often get asked when working with buyers and sellers that don’t do a lot of real estate transactions if you will. And today I want to just kind of get into detail about it and help you understand it. So what is a contingency? A contingency is something that allows either the buyer or the seller to have an out on the real estate contract if you will. That’s the easiest way to explain it. And depending on how it’s done, gives the buyer and/or the seller the reason to back out of a contract.
But generally speaking, when you’re purchasing a property in the state of California, you have six contingencies when you’re purchasing a house. And those contingencies are financing, the appraisal, seller disclosures, a home inspection, title report. Essentially, those sorts of things. And what a contingency does is say, for example, your appraisal doesn’t come in at value. That gives you a reason to back out of the contract. Same thing with financing. If you can’t secure a loan, it gives you a reason to back out of the contract. That’s what contingencies do. They allow you to back out of the contract if you’re not able to satisfy that item if you will.
Now, with regards to seller disclosures, there’s nothing you’re satisfying, but you are reviewing the disclosures from the seller and one of those items is a document where sellers disclose things that they’re aware of about the property. So you might review that document as a buyer and find something on there that you’re not okay with. That gives you a reason to back out of the contract. So when you go into contract, generally speaking, you put earnest money, escrow deposit, down on the property. That money is normally a 100% refundable on the buyer-side until you release all of your contingencies.
And in the state of California, how the residential purchase agreements currently written is that you have 17 days to release all of your contingencies outside of the loan. So the loan is set at 21 days. All the other contingencies are set at 17 days. And so up to 17 days, you could back out of the contract for really no reason at all. And then after 17 days if you have released essentially all those contingencies, except for the loan, then more or less you have the loan that’s still out there, that if you’re not able to satisfy that and/or get the desired rate that you put on the purchase agreement when you initially wrote the contract, then you have that contingency to back out.
Now, before I get into to what happens, but there’re also seller contingencies. So a seller if they’re selling a property, they can put it contingent upon finding a suitable replacement property. So that means even if they go into contract with a buyer, that contingency allows the seller to back out of the contract if they’re not able to find a property to replace their current residents. You can also have it on the buyer’s side. So they put in an offer contingent upon selling their current property. So they have a house to sell, but they’re putting in an offer in on another property, and the house that they’re currently living in if that doesn’t close, they can use that as a reason to back out of the contract. That kind of is the most general way to explain them and give you some good examples.
Now, what happens after you release contingencies and you want to back out of the contract? That’s when you have problems. That’s when the escrow deposit becomes a potential issue with regards to your … You could lose the escrow deposit if the seller wants to take it after contingencies have been released. On the seller side, if you’re in a contract and you decide that you just don’t want to sell the property and you haven’t put up any contingencies and the buyer doesn’t want to let you out of the contract, they don’t have to. You can decide as a seller that you don’t want to move forward, but that’s where you have problems. Because the seller can pursue it, get an attorney and really force the issue and they can sue for damages. They could sue you to force you to sell your house. There’s a lot they could do and really make your life miserable if you’re a seller and you decide to back out for any of those reasons.
So depending on the circumstance, there’s a way to structure it so that you are protected. But just make sure that you’re covering those up front with your real estate professional when you’re listing your house or buying a house, just to make sure that if something does come up it gives you an out if you will. So anyhow, I appreciate you taking the time to watch. If you have another topic you want me to, to discuss, reach out to me. Send me an email, comment on my video. I’m happy to do it. And again, appreciate you taking the time to watch and we’ll see you again soon.
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Other videos you might find helpful:
Orange County Real Estate Market Update – https://youtu.be/iEE4BgSBZWA
How Much Deposit Do I Need To Buy a House? https://youtu.be/6OUqU919cpo
How much does it cost to sell a house?: https://youtu.be/v6PR1gIvIA8
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