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How do contingencies operate in real estate contracts?

Buying a home is an exciting time in a person's life, whether the person is buying their first home or whether the person is upsizing or downsizing from an existing home. Part of the homebuying process includes the execution of a real estate contract. However, such contracts may have contingencies that need to be met before the sale can be completed. The following is a basic overview of contingencies in real estate contracts.

In a nutshell, contingencies are conditions or actions that must be fulfilled to make a contract legally enforceable. Under certain circumstances that are negotiated and agreed upon by the buyer and seller, if a contingency goes unfulfilled, one or both parties may back out of the real estate contract.

One common contingency involves time frames, such as how much time the buyer has to inspect the home or how long the buyer has to secure a loan and for how much. Any contingency clauses must be clear, so that they buyer and the seller understand what they are agreeing to and knowingly approve of it.

If a contingency goes unfulfilled, the real estate contract becomes null and void, and either the buyer, seller or both can back out of the agreement without suffering any legal consequences. On the other hand, if all contingencies are fulfilled, the contract becomes binding, and if the buyer or seller tries to back out of the contract this would be considered a breach of the contract.

If a real estate contract is breached, it is possible that any earnest money must be forfeited, or the breaching party could even be sued for specific performance, meaning the home must be bought or sold, depending on the situation. These are undesirable consequences, so parties to a real estate contract will want to ensure they have legal advice before agreeing to a contingency, so they understand what their rights are and the consequences for failing to fulfill a contingency.

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