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What are contingencies in real estate?

Contingencies are part of the normal part of property negotiations in any real estate transaction.

As you go back and forth with the buyer or seller (depending on which role you are in), usually through your realtors or attorneys, you're going to each have a list of stipulations that you'd like to see attached to the contract in order to seal the deal.

These are the contingencies, and -- big or small -- they can have a huge effect on your future. Here are some things that you need to keep in mind:

  1. Just because your buyer or seller sends a list of contingencies he or she would like to see attached to the contract, that doesn't mean that you have to agree to them. More than likely, the person is asking for far more than he or she expects to get.
  2. All houses have some problems and to some degree are purchased "as is." You can mitigate the potential financial impact of this by having an independent evaluation of the electrical system, plumbing system, roof and so on handled prior to the purchase -- and if you're selling, you should expect the same from your buyer. Your contingency list is often based off what is found in that report.
  3. Flexibility is key. If you are asking for something the seller or buyer cannot afford to do or simply won't do, you have a decision to make. How important is this deal to you? If you're the buyer, is there something important about this property that makes it worth paying closing costs or covering the faulty electrical work?

In commercial property, location can be so important that it may be worth the contingencies. If you're breaking into a franchise, how well your location fulfills a need for that franchise (like a gap in delivery areas between two other franchised restaurants of the same type) can be important.

Don't panic if your seller or buyer comes back with a list of contingencies. Negotiate. Study the list carefully for clues of any serious issues that are being hidden and decide just how much you will or won't bend.

Most importantly, talk to your real estate attorney before you make any final agreement.

Source: Why Realty, "Contingencies in the Offer," accessed Nov. 03, 2017

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