These contingencies need to be met for the contract to be binding. In real estate, a short sale is when a homeowner in financial distress sells their property for less than the amount due on the mortgage. To understand why this is valuable, you need to understand a bit about the loan process and how appraisals work. A contingency clause is a contract provision that requires a specific event or action to take place in order for the contract to be considered valid. Generally, when a property buyer buys a piece of real estate, he or she is assuming that the value of the property is accurately represented by the sale price. A contingency clause defines a condition or action that must be met for a real estate contract to become binding. If the home appraisal is lower than the agreed purchase price, the contract is still valid, and the buyer is expected to complete the sale. This means that it is imperative that a contingency clause is placed in the contract that permits the buyer to use the land as he or she intended even if there is a change needed to the current use. Sample Mortgage Contingency Clause: The following is an example of a mortgage contingency clause that you may find in a purchase contract. It is an “out” clause for the Buyer to have their deposit returned if they are unable to secure a commitment from their lender for the mortgage. This clause is fairly common in real estate contracts, but it will weaken your offer. The reason lenders do not allow this because if a borrower defaults on the loan, they will not be able to recoup their money because the house is worth less than what the loan is for. This loan contingency protects buyers from being held to the contract if they are unable to find financing. Typically, the contingency of the seller finding a new home will take precedence on the buyer’s contingencies. Financing Contingency: Also referred to as a mortgage contingency, the buyer can gain more time to obtain financing in order to purchase the property. For example, if a buyer backs out and the seller is unable to find another buyer, the seller can sue for specific performance, forcing the buyer to purchase the home. If the difference between the Appraised Value and the Sales Price is more than $_____ (the “Market Cap”), the Buyer may, subject to the time requirements of Section 3, terminate this contract. Purchaser (or Seller) shall pursue the above at their own expense and with due diligence. Exploring the Most Common Conditional Offers in Real Estate, obligations of each party in a real estate transaction. If Buyer fails to terminate this Agreement on or before the Contingency Expiration Date, Buyer shall be deemed to have waived this Home Sale Contingency. Some contingency clauses are commonly used when making an offer. Appraisal Contingency: The appraisal contingency is used when the buyer wants to make sure that the property is valued at at least the specified amount. Buyers can also walk away from the deal if the home inspection comes back with unfavorable results. “Bump Out” Clause. Sometimes a contingency clause is attached to an offer to purchase real estate and included in the real estate contract. A seller may want to continue to market their property while the buyer is working through clearing contingencies (financing, inspection, appraisal, etc. A contingency clause defines a condition or action that must be met for a real estate contract to become binding. She really wants the property. The seller might have the opportunity to lower the price to the appraisal amount. It is important to follow the laws and regulations of your state. You are taking a huge risk by waiving the appraisal contingency. ). If the conditions of the contingency clause are not met, the contract becomes null and void, and one party (most often the buyer) can back out without legal consequences. Otherwise, the buyer automatically waives the contingency and becomes obligated to purchase the property—even if a loan is not secured. Earnest money is a deposit made to a seller, often in real estate transactions, that shows the buyer's good faith in a transaction. The seller retains the right to cancel the contract if the buyer’s home is not sold within the specified number of days. It’s not unusual for a buyer to have a contingency that allows for a formal appraised value at or above purchase price. Only if you are very confident in your ability to obtain financing should you waive this contingency. 2. This may require special permits, approvals or other matters. Frequently, the seller counters the offer and negotiations go back and forth until both parties reach an agreement. The kick-out clause is a contingency added by sellers to provide a measure of protection against a house sale contingency. An inspection contingency allows the buyer to cancel this contract based on the findings in the home inspection. If they are doing a VA or FHA loan you should include an FHA/VA Addendum and that addendum includes an appraisal contingency. Investopedia uses cookies to provide you with a great user experience. An inspection or a due diligence contingency gives the buyer the right to have the home inspected within a specified time period. When a homebuyer submits an offer to a seller, the buyer can include certain conditions that must be met for the purchase to be finalized. APPRAISAL ADDENDUM TO THE CONTRACT BETWEEN THE UNDERSIGNED PARTIES CONCERNING PROPERTY AT _____ (Street Address and City) 1. If the property does not appraise for at least the specified amount, the contract can be terminated. 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