What Is a Real Estate Contingency?

Although market conditions vary by location and price range, housing inventory remains limited in many parts of New Jersey. Homes that are well-priced and located in desirable areas often attract multiple buyers and receive competing offers.

At the same time, some properties remain on the market for an extended period. Common reasons a home may take longer to sell include:

• The listing price is higher than comparable market values

• The property has defects that are not reflected in the asking price

• The seller is unwilling to negotiate even when a buyer presents reasonable terms

• The property’s condition, photographs, marketing, or showing preparation is inadequate

• The seller lacks flexibility regarding the closing date or other contract terms

Although many factors can affect a home sale, pricing usually has the greatest impact. When a property is priced appropriately based on its location and condition, it is more likely to attract buyer interest and offers.

In a multiple-offer situation, sellers evaluate more than the purchase price. They may also compare the buyers’ down payments, financing terms, appraisal and inspection contingencies, and proposed closing dates. Some sellers may prefer offers in which certain contingencies have been limited or waived.

What exactly is a real estate contingency, and what types of contingencies are commonly included in a New Jersey home offer?

What Is a Real Estate Contingency?

A contingency is a provision in a real estate contract that allows a buyer to renegotiate or terminate the contract if a specified condition is not satisfied.

For example, contingencies may protect a buyer if the buyer cannot obtain mortgage approval, the property appraises below the contract price, or a home inspection reveals a serious problem.

The protection provided by a contingency—and the buyer’s right to terminate the transaction—depends on the exact wording and deadlines stated in the contract. Therefore, it is important to understand not only whether a contingency exists, but also the conditions, limitations, notice requirements, and deadlines that apply to it.

Common Contingencies in New Jersey Home Offers

1. Mortgage Contingency

A mortgage contingency makes the purchase conditional upon the buyer obtaining the required mortgage financing within the period stated in the contract.

Even if a buyer has received a mortgage pre-approval, final loan approval is not guaranteed. After the contract is signed, the lender conducts a more detailed review of the buyer’s income, assets, credit, debts, and employment. The lender also evaluates the property’s condition and appraised value.

A mortgage contingency may address the following:

• Required loan amount

• Type of mortgage

• Financing application deadline

• Mortgage approval or commitment deadline

• Procedures that apply if financing is denied

If the buyer fails to comply with the contractual deadlines or notice requirements, the buyer may lose the protection provided by the mortgage contingency.

The Consumer Financial Protection Bureau also explains that including appropriate financing and inspection contingencies in a home offer can help protect buyers. 

2. Appraisal Contingency

A mortgage lender generally requires an appraisal to determine the value of the property being used as collateral for the loan.

If the appraised value is equal to or higher than the contract price, the transaction can usually proceed without an appraisal-related issue. If the property appraises below the contract price, however, the lender may reduce the loan amount.

Depending on the contract terms, the buyer may consider the following options:

• Ask the seller to reduce the purchase price

• Pay the difference with additional cash

• Negotiate for the buyer and seller to share the difference

• Request an appraisal reconsideration or a second appraisal

• Terminate the contract under the appraisal contingency

In a competitive market, a buyer may waive the appraisal contingency entirely or offer to cover a specified portion of an appraisal shortage through an appraisal gap provision.

For example, suppose the contract price is $700,000 and the buyer agrees to cover an appraisal gap of up to $20,000. If the property appraises below the contract price, the buyer’s additional cash obligation will be determined by the specific language of the contract.

3. Home Inspection Contingency

A home inspection contingency allows the buyer to evaluate the property’s condition before deciding whether to proceed with the purchase.

Common inspection areas may include:

• Structure and foundation

• Roof and exterior

• Electrical and plumbing systems

• Heating and cooling systems

• Leaks, water intrusion, and moisture

• Termites and other wood-destroying insects

• Radon

• Underground or above-ground oil tanks

• Septic systems and wells

• Environmental and safety concerns

If the inspection identifies problems, the buyer may be able to request repairs, a seller credit, or a price adjustment, depending on the contract terms. If a serious defect is discovered and the parties cannot reach an agreement, the buyer may have the right to terminate the contract.

A seller is not necessarily required to repair every minor defect. During negotiations, it is important to distinguish ordinary wear and tear in an older home from major structural, environmental, or safety-related defects.

The CFPB’s home inspection guidance also explains that when a contract contains an appropriate inspection contingency, a buyer may be able to negotiate repair costs or cancel the purchase after discovering a serious problem.

4. Home Sale Contingency

A home sale contingency may be used when a buyer must sell a currently owned property before purchasing a new home.

The provision may allow the buyer to terminate the new purchase contract or extend the closing date if the existing home is not sold within a specified period.

From the seller’s perspective, however, this contingency creates additional uncertainty because the transaction depends on the sale of another property. In a competitive seller’s market, an offer containing a home sale contingency may be less attractive than an offer that is not dependent on another sale.

5. Title Contingency

At closing, a buyer should receive clear and marketable title to the property. A title search may identify issues involving:

• The property’s legal owner

• Existing mortgages and liens

• Unpaid property taxes

• Court judgments and debts

• Ownership disputes

• Easements and restrictions

• Unresolved permits or other recorded matters

If a title problem is discovered, the seller is generally expected to resolve it before closing. If the problem cannot be resolved, the closing may be postponed or the contract may be terminated, depending on the contract terms.

6. Homeowners Insurance Conditions

In some cases, homeowners insurance may be difficult to obtain or may be considerably more expensive because of the property’s location, flood risk, roof age, condition, or prior insurance claims.

Insurance concerns may be especially important for properties with:

• A location within or near a flood hazard area

• An older roof

• An outdated electrical system

• An underground oil tank

• A history of major insurance claims

Buyers should confirm insurance availability and obtain an estimated premium early in the transaction.

An insurance contingency is not automatically included in every contract in the same form. If insurance availability is a significant concern, the buyer should consult a real estate attorney about including clear and appropriate language in the contract.

Attorney Review in New Jersey

Attorney Review is not technically the same as a standard contingency, but it is an important part of many New Jersey residential real estate transactions.

After the buyer and seller sign the initial contract, their attorneys review its terms and may propose changes or additional provisions. During this process, the attorneys may clarify the inspection, mortgage, appraisal, title, and closing terms.

The completion and legal effect of Attorney Review may depend on the contract language and the notices exchanged between the attorneys. Buyers and sellers should always confirm the status of Attorney Review with their respective attorneys.

Does Waiving Contingencies Make an Offer Stronger?

An offer with fewer contingencies may appear more attractive to a seller because it may seem less likely to be canceled. However, waiving contingencies can expose the buyer to significant financial and legal risks.

Waiving the Inspection Contingency

If structural, water, termite, environmental, or other significant problems are discovered after the contract is finalized, the buyer may have to pay the repair costs without assistance from the seller.

Waiving the Appraisal Contingency

If the property appraises below the contract price, the buyer may be required to pay the difference in cash.

Waiving the Mortgage Contingency

If the buyer cannot obtain final loan approval, the buyer may still be obligated to complete the purchase. The buyer could risk losing the deposit and may face additional legal liability.

Instead of automatically waiving every contingency, buyers may consider limiting their risk in more specific ways:

• Limit inspection requests to structural, environmental, and safety-related defects

• Agree not to request repairs below a specified dollar amount

• Set a maximum appraisal gap contribution

• Use a realistic but shorter mortgage approval period

• Offer a closing date that accommodates the seller’s schedule

• Provide a substantial down payment and clear proof of funds

NJ REALTORS® also provides forms designed to help buyers acknowledge certain risks associated with waiving inspection or appraisal protections. NJ REALTORS® Forms and Resources

What Does a Seller Compare When Reviewing Offers?

The highest offer is not always the strongest offer. Sellers commonly evaluate the following terms:

• Purchase price

• Down payment percentage

• Cash purchase or mortgage financing

• Mortgage pre-approval status

• Appraisal terms

• Inspection terms

• Earnest money deposit

• Proposed closing date

• Home sale contingency

• Proof of funds

• Ability to accommodate the seller’s preferred terms

A seller may select an offer with a slightly lower price if the buyer has strong financing, clearly defined contingencies, sufficient funds, and the ability to close on the seller’s preferred date.

Conclusion

Real estate contingencies are important contract provisions that can protect buyers from unexpected financial and legal risks.

In a competitive New Jersey housing market, limiting certain contingencies may make an offer more attractive. However, giving up too much protection can leave the buyer responsible for an appraisal shortage, expensive repairs, the loss of the contract deposit, or other financial obligations.

A strong offer is not simply an offer with the highest price. It should define the amount of risk the buyer can reasonably accept while also showing the seller that the transaction has a strong likelihood of closing successfully.

Before submitting an offer, buyers should carefully review the conditions, deadlines, and potential consequences of each contingency with their real estate agent, mortgage professional, and New Jersey real estate attorney.