Making an offer for a real estate investment is something fraught with uncertainties that will bind you for an intermediate to long term. Building appropriate contingency clauses in your agreement for a piece of property can help mitigate some of those risks by outlining prerequisites under which the deal will close.
Mortgage contingencies can protect buyers
A commonly used contingency in such a situation is a mortgage contingency. This clause stipulates that closing will take place only if the person making the final decision on a particular piece of property and he is able to secure a specific type of mortgage, at or below specific rates, on or before the closing deadline.
Should the buyer be unable to arrange the specified mortgage to finance his/her property, they are allowed to renege from the deal and any deposits returned to them with no penalty.
Mortgage contingencies can protect sellers
Mortgage contingencies also provide sellers of properties some protections. If the buyer of the property is unable or unwilling to arrange finance, and does not communicate with the seller per the agreed deadline, he/she may still be liable to go through with the deal, even without funding in place. Alternately, some mortgage contingencies allow sellers in such cases to arrange a mortgage for the buyer so the agreement can proceed as planned.
There may be various other ways in which sellers can phrase contingency clauses to protect their interests. To preclude the buyer of the land from reneging on the deal at the last minute, contingency deadlines can be set several weeks prior to the actual closing deadline. Also, to discourage bad faith on the part of the buyer, the earnest money for the property can be set to a level that will encourage buyers to be earnest in their dealings.
Other contingency clauses
- A common contingency that usually works in parallel with Mortgage contingencies is the Appraisal contingency clause. These can come in two flavors. Should the person making the real estate investment not receive a property appraisal that’s at least as much as the list price of the property, he/she is entitled to walk away from the deal. In the other variant of the Appraisal contingency, if the buyer is unable to have the property independently appraised to at least the value listed by the seller, he/she can request the seller to lower their asking price. Should the seller refuse this request, the Appraisal contingency clause allows the deal to be declared void without prejudice to either party.
- An important contingency in such a transaction is the Inspection contingency. Under this clause, a buyer is allowed a reasonable window of time, anywhere between three to fourteen days, to arrange for and conduct a home inspection of the property. Under this type of a contingency, should this inspection uncover significant issues with the transaction, the buyer is within his/her rights to walk away from the transaction without prejudice.
While these are some of the most common contingencies generally applicable in such transactions, each state may have their own version of these commonly applicable contingencies for real estate investment. There may be others too, such as contingencies related to mold inspection or insurance provisions.
Read between the lines
When making the final contract, always pay close attention to the fine print in the agreement. It is a good idea to retain a real estate lawyer to review the contract before you sign. Otherwise, you could violate clauses you knew nothing about, or be stuck paying for a real estate investment that you can’t afford!