What Are Contingencies in a Real Estate Purchase Contract?

Published On: May 25th, 2021

Whether you’re buying a single-family home or a multifamily property for sale in Silicon Valley, you’ll hear the term contingencies floated around – but what does that mean, and does it apply to you? What, exactly, are contingencies in a real estate purchase contract? Here’s what you need to know.

What Are Contingencies in a Real Estate Purchase Contract?

Contingencies are conditions that must be met for a real estate transaction to go through. When you’re buying a multifamily property in Silicon Valley (or anywhere else, for that matter), your real estate agent will build contingencies into your contract to protect you.

The most common real estate contingencies involve:

Financing
Appraisals
Inspections

Here’s a closer look at each.

Financing Contingencies in Real Estate Purchase Contracts

A financing contingency protects you in the event that you can’t come up with financing to purchase the property. That means you won’t be on the hook for hundreds of thousands of dollars if you can’t get a lender to agree to give you the cash.

Your real estate agent will build this contingency into your contract so that it’s okay for you to walk away from the deal in the event that this happens – and you’ll most likely get to keep your earnest money deposit, as well (though every contract is different).

Appraisal Contingencies in Real Estate Purchase Contracts

Before a lender will agree to give you the money to buy a multifamily property, it’ll send out an appraiser. The appraiser will determine whether the property is worth what you’re asking to borrow. If the appraiser believes that the property is worth less than that amount, the appraisal is said to come in “low.”

When an appraisal comes in low, the lender won’t finance the full amount. However, it may choose to provide funding for the appraised value so that you have to come up with the rest.

If the property you want to buy appraises low and there’s an appraisal contingency in your contract, you don’t have to buy the home anyway. The contingency lets you off the hook so you can walk away from the deal (usually with your earnest money intact).

Inspection Contingencies in Real Estate Purchase Contracts

Before you sign the final paperwork on a real estate deal, you’ll have an inspector check out the property. That way, you know exactly what you’re getting into. If the inspector uncovers issues that you’re not willing to work with, you have a few options. You can:

Ask the seller to fix them
Ask the seller to provide you with a credit so you can use the money to make repairs
Walk away from the deal, but only if you have an inspection contingency in your contract

If you have an inspection contingency built into your contract, you’ll be able to change your mind about purchasing the home. (And if you don’t, you’ll have very little leverage to negotiate with the seller on repairs or credits.)

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