When are there reasons to remove real estate contingencies?

On Behalf of | Jan 19, 2024 | Real Estate Transactions | 0 comments

In a real estate transaction, contingency clauses are often used. Consider loan contingencies. Someone may get preapproval for a $500,000 loan to purchase a commercial or residential property. But they have not gotten final approval yet, so they put a contingency clause in the contract governing the transaction specifying that they don’t actually have to abide by their offer if they aren’t given approval for the loan.

The reason to put this kind of contingency in place is to protect the buyer. Without this contingency clause, even if the lender rejected their application, they would still be legally obligated to purchase the property. They wouldn’t have the $500,000 to do so, creating a very complex situation. With a contingency clause in place, they can walk away from the deal if the loan falls through, and there will be no penalty for doing so. A similar kind of contingency clause is often used for property inspections.

Why would someone remove these clauses?

Removing contingency clauses means removing these protections. This is a risk that some buyers decide to take. The general reason to do this is to make an offer more attractive to the seller. Contingency clauses increase the odds that a deal can fall through – if the property fails inspection or if the loan is not approved, for example. If a seller has multiple offers that are virtually the same in terms of financial compensation, they may choose the offer without contingency clauses because it has a greater chance of going through.

Drafting offers and purchase agreements

When engaging in real estate transactions, it is very important to understand exactly how offers and purchase agreements are written. As such, seeking legal guidance proactively is generally wise.