When you enter into a real estate transaction, you have to sign a contract. However, you may find yourself wishing you could get out of the deal. In some cases, you can, but it's often important to have contingencies.
These contingencies are essentially requirements that must be met for the contract to be legally binding. Some of the most common ones in a real estate purchase include:
- The house has to pass the inspection.
- The house has to appraise for the appropriate value.
- The buyer has to get approved for the loan.
- The buyer has to review the property disclosures and agree to them.
- The buyer has to see other mandatory reports.
Some of these contingencies are very obvious. In the modern era, most buyers use mortgage loans when buying houses rather than paying in cash. To make an offer on a home, the buyer first goes to the bank and gets pre-approved. They make the offer with the pre-approval notice.
However, that is not a final approval. If the seller accepts the offer, the bank then goes over the details with the buyer and decides if they'll really get the loan or not.
If they don't, there's no realistic way for them to buy the house. They simply do not have the cash. It would harm both parties to force the buyer to stay in a contract that they could not fulfill. With the right contingencies in place, the deal simply falls apart and the seller can look for another buyer.
This is a simple example, but it does show why you really need to know exactly what the contract says during any real estate transactions.