What is a contingency?

In real estate, a contingency is a contractual condition which states that certain criteria must be met in order to proceed with the purchase/sale of a property. Others may frame a contingency as “a way out” of a contract. Real estate contracts spell out the “what ifs” pertaining to each contingency, including, but not limited to, specific timeframes, steps which must be completed and by whom, as well as who will be responsible for any payment. Alan Tonnan, author of The Complete Guide to Washington Real Estate Practices, defines a contingency as “a provision placed in a contract which requires the completion of a certain act or the happening of a particular event before a contract is binding” (p. 133).

In competitive markets, contingencies (or the lack thereof) can make a substantial difference in the eyes of the buyer/seller, sometimes making or breaking the deal. In some cases, buyers may elect to waive contingencies in order to make their offer “stronger” or more attractive to the seller. Consider this scenario:

Mrs. Seller receives two offers for her property. Both offers are identical in terms (same purchase price, same closing date, et cetera) with on exception: one offer is contingent upon a home inspection. The other offer has waived the home inspection contingency. If all other aspects and details of the contract are identical, Mrs. Seller is more likely to take the offer which has waived the home inspection. For Mrs. Seller, a contract which lacks a home inspection appears stronger at face-value. A home inspection may reveal problems that the buyer may ask Mrs. Seller to remedy  — or, at the very least, an inspection could allow a buyer time to reconsider their intention of purchasing the property from Mrs. Seller and provide a legal avenue for the buyer to exit the sale’s agreement unscathed. If a buyer legally rescinds upon sale’s agreement vis-à-vis a home inspection contingency,  Mrs. Seller will have lost valuable time and may have possibly lost the other buyer. This will force Mrs. Seller to start the whole process over again.

A contingency is a condition which must be met in order to proceed with the contract as it is written; it is a stipulation or requirement which must be achieved or realized. Buyers may want to insulate themselves with contingencies as they provide viable legal avenues to depart from the sale’s agreement. Sellers, on the other hand, may prefer fewer contingencies as each elected contingency has the hypothetical potential of obstructing a sale’s agreement from closing. Any buyer that waives a contingency should consult legal counsel before proceeding. Waiving a contingency inherently exposes the buyer to potential risk should something go awry (even at no fault of the buyer).

Contingencies protect all involved parties; contingencies help buyers and sellers minimize risk. Contingencies should be clearly written and unambiguous. Both the buyer and seller should clearly understand the pros and cons of electing/waiving each respective contingency. The details of the sales agreement are extremely important, and buyers/sellers should work in concert with competent real estate professionals, tax advisors, attorneys when it comes to handling the purchase/sale of real estate, especially in regard to contingencies.