Whether you’re a first-time buyer or you’ve done it before, you’ve undoubtedly come across the term contingency in your property search. Contingencies are a crucial aspect of home buying that protects both buyers and sellers. A contingency is a condition that must be met before a sale can be finalized. There are different types of contingencies, but today we’ll focus on housing contingencies and the top types of contingencies that every homebuyer should be aware of.

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Key Highlights

• Housing contingencies are conditions that must be met before the sale of a property can be finalized. It allows the parties to back out of the deal under certain circumstances.
• Some housing contingencies protect the buyer, while others protect the seller.
• If a contingency is not fulfilled, it can result in the termination of the contract, the return of the earnest money, and potentially, legal action. 

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Understanding Housing Contingencies When Buying or Selling a Home

A contingency is a condition in a real estate contract that states that the sale of a property will only be completed if the stated condition is met. This condition is designed to protect both the buyer and the seller from unexpected legal or financial problems that could arise after the sale is completed. It ensures that the sale only takes place when all the necessary conditions are met and both parties can proceed without any issues.

So, what’s the difference between “contingent” or “pending” for a listed property?

Once a property has received an offer from a buyer but there are contingencies that need to be dealt with, the status of the property becomes contingent. Once the contingencies are met but before the deal is closed, the status of the property is pending.

Sale & Settlement Contingency

If you’re like many buyers in Canada, you probably have to sell your current home before starting the buying process for your future home. This is where a sale and settlement contingency comes in handy. This contingency protects you, the buyer, from being responsible for two mortgages at once and ensures that the purchase of your new home is contingent (as in dependent) on the successful sale of your current home. 

If, by any chance, you’re unable to sell your current home within a specified period, the contingency allows you to back out of the purchase of your future home without penalty. 

Settlement Contingency

A settlement contingency is similar to the previous one but in this case, the buyer has already received an offer on their current home. They already have a contract signed and set a closing date for the sale in the subsequent weeks. They are one step closer, however, there’s still a risk that the deal falls through on their current home and the settlement contingency will allow them to back out without penalties. If the sale goes through at the accorded date, then they can continue the buying process of their future home.  

Common Housing Contingencies for Buyers and Sellers

Here are some of the most common house contingencies for buyers and sellers in Canada.

1. Mortgage Approval & Inspection Contingency 

This is probably the most common type of contingency for buyers and sellers. If a buyer is unable to obtain financing or if the inspection uncovers substantial problems with the property, this contingency permits them to withdraw from the sale. This clause ensures that the buyer is not held financially liable if they cannot obtain a mortgage or if there are hidden property issues.

2. Cost-of-Repair Clause Contingency

The cost-of-repair clause contingency gives assurance to the buyer that the seller will be responsible for any repairs over a certain limit. By setting a limit for repair costs, this contingency protects you from unexpected repair expenses. It also ensures that the seller takes responsibility for any major issues with the property.

3. Title Verification Contingency

The title deed is the legal document that accredits the ownership of a property. In order to avoid any surprises later, it’s always good to add a title verification contingency when buying a home. It will protect you, as the buyer, by ensuring that the seller has the legal right to sell the property. This contingency requires the seller to provide a title report or title insurance policy that confirms their ownership of the property and any liens or encumbrances that may affect the sale. 

4. Specific Property Requests 

Is there an unfinished basement or outdated kitchen appliances that need replacing?

If you’re really interested in a property but there are things that put you off from making an offer. For instance, you might want to make sure that the appliances are replaced or that the basement is finished. Then you’ll use specific property requests that will be added to the contract as a contingency. 

By doing this, the seller will know what you are expecting, and they’ll have to finish any work before the sale can be completed. This way, you can be sure that the property will meet your needs before you go ahead with the purchase.

5. Sale of a Prior Home Contingency

This contingency is what we saw earlier. It allows the buyer to back out of the sale if they are unable to sell their existing home. This protects the buyer from being responsible for two mortgages at once and ensures that the sale only goes through if they are able to sell their current home.

6. Appraisal Contingency

Does the price of the property you’re about to buy seem above market value? Sometimes, it’s necessary to get expert advice when it comes to ensuring that the sale price reflects the true market value of the property. 

In this case, you’ll ask for an appraisal contingency before committing to buying the property. It allows you to back out of the sale if the appraisal comes in lower than the purchase price. 

7. Homeowners Insurance Contingency

Our final example of contingency is a homeowner insurance contingency. Is this property actually insurable? It may come as a surprise but some properties are not insurable. This clause allows you to check with home insurance companies whether or not you’ll be able to get an insurance before buying the property. 

What Happens if a Contingency Isn’t Fulfilled?

In many cases, the failure to fulfil a contingency will result in the contract being terminated, and the sale not going through. Both parties go their separate ways.

In some cases, the parties may be able to negotiate a resolution if a contingency isn’t fulfilled, but it ultimately depends on the content of the contract and the willingness of both parties to work together to find a solution.

If a contingency in the contract is not fulfilled and the sale falls through, the earnest money may be returned to the buyer. Earnest money is the deposit made by the buyer to show their commitment to purchasing the property, usually about 1 to 3% of the property value. If the buyer backs out of the transaction without a valid reason then the earnest money may be kept by the seller as compensation.

What Contingencies Should You Always Include?

The contingencies that you should always include in a real estate contract depend on your specific situation, but there are some common contingencies that are recommended for most buyers and sellers.

One of the most critical contingencies to include is the mortgage approval and inspection contingency. If relevant to your situation, make sure to add a contingency allowing you to back out of the sale if you’re unable to secure financing or if the inspection reveals significant issues with the property. It will protect you from financial responsibility if you cannot secure a mortgage or if there are problems with the property that you were not aware of before.

Other important contingencies are the sale and settlement contingency, the title verification contingency and sometimes the specific property requests contingency, especially for older or outdated properties. 

Overall, it’s essential to add contingencies that protect your interests and ensure the sale goes smoothly. We always recommend consulting with a real estate expert to determine which contingencies are necessary for your specific situation.

Final Thoughts

In conclusion, understanding and including contingencies when buying or selling a home is essential for protecting both parties involved in the transaction. 

By including contingencies, buyers can ensure that they are not financially responsible for issues that may arise during the buying process, while sellers can ensure that they are not stuck with an unexpected and costly repair. 

Remember, contingencies are there to provide protection and peace of mind, so it’s crucial to understand which ones are relevant to your situation and include them in your contract.

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