How Real Estate Contracts & Contingencies Work -- Simplified

At the core of the home buying and selling process is the contract. It's basically the document that controls everything in the transaction. But what is it really? What does it mean? How do contracts work and what governs what?

First off, you don't need to know all the details. That's what we're here for. But, you will probably be more comfortable and have a smoother home transaction if you know some of the basics. And that's what I'm going to lay out for you here.

Don't worry, I'll make it simple.

When a buyer writes a contract on a house, they are basically saying,

"I promise I will buy this house, but there are some conditions."

The "conditions" are technically called "contingencies."

When you put a house under contract, you also deposit earnest money in an escrow account. The earnest money (typically around 1% of the purchase price) is basically a way of saying, "Here's some money to prove that I'm serious about buying this house. If I don't do what I said I'll do in the contract, you can keep this money."

Here are some of the common contingencies that are on the standard sale contract we use in Missouri.

Private/Independent Inspection: Most contracts give you the right to hire a qualified, independent, private inspection company to go over your house from top to bottom. It is this expert's job to identify things that you, as a regular person, wouldn't be able see with their own two eyes.

In laymen's terms, the contract says, "I promise I'll buy this house unless the inspection reveals something crazy." If you aren't happy with the inspection, you don't have to buy the house and you get your earnest money back. You do, however pay out of your pocket 500-100 bucks for the inspection and there's no getting that back.

Municipal Inspection: Most cities (municipalities) require their own inspection. Not all do, though. If the city requires an inspection, you are basically saying, "l'll buy the house if the city inspection passes." If it doesn't pass, the seller is going to want to fix it, otherwise, you might bolt!

Financing: If you can't get a loan, you don't have to buy the house. You will submit a pre-approval, but there are still things that could go wrong. So, if anything goes wrong with your loan, you don't have to buy the house and you get your earnest money back.

Appraisal: This is usually kind of a subset of the financing contingency. If the house is appraised for less than you have it under contract for, you don't have to buy it and you can get your earnest money back. No problem. Usually your lender will make you pay for the appraisal, thought and you're not getting that back.

Insurability: If you can't get insurance on the house for some reason (this is not common), you don't have to buy it.

Title: If the seller cannot provide a clear title, in other words if they cannot prove that they are the legal owner and have the ability to transfer title to you, you don't have to the buy the house.

There are a lot of other nuances and details, but that's the core of how contracts work.

What questions do you have about buying or selling a house?

Anything you want to look at? Give us a call or text at 314.451.2440 or email contact@essentialstl.com. We're here to help.

Featured Image: by Cytonn Photography on Unsplash