What is the contingency period? What are contingencies and how do they work?

contingent adjective

con·​tin·​gent | \ kən-ˈtin-jənt  \

Definition of contingent (Entry 1 of 2)

1: dependent on or conditioned by something else

Payment is contingent on fulfillment of certain conditions.

2: a plan contingent on the weather  "We will go to Disneyland next week if the rain holds off"

In a real estate transaction, a contingency refers to a clause in a purchase agreement that is a requirement(s) that must be met before the buyer is locked in and the earnest money deposit becomes "at risk". For instance, if a buyer backs out BEFORE contingencies are lifted the deposit is not at much risk ot the seller claiming he has a right to keep the deposit... but as specific contingencies are lifted, the seller has claim to the earnest money, the buyer has no grounds to exit the transaction claiming that contingency as the reason: he has removed that as a reason to back out. 

For example, if I buy a home, I get a chance to do my investigations: home inspection, appraisal, and get full loan approval before I am "locked in". I  have written an offer assuming that the property is without major issues, it's in good shape.  The contingency period is the time set aside for me to do my investigations and gather information. I have written an offer saying "I will pay you $----- for the property AS LONG AS... 

The contingency period is the amount of time set out in the contract for the buyer to ensure the property is in good condition, to have the appraisal and inspections done and review the seller's disclosures regarding the property . Once I get all this has been verified. the next step for the buyer, is to lift each specific contingency .  Once all the contingencies have been lifted, the real estate contract becomes binding. and the buyers earnest money deposit becomes "at risk" meaning the seller can claim the money if certain other conditions are met.

Sellers prefer purchase contracts with shorter contingency periods, default is 17 days (see example above), and fewer contingencies overall, because the faster they know youre "all in" it's better because they don't want to take their house off the market for someone that is not "all in". 

Both the buyer and seller must agree to the length of each contingency in the negotiation process of the offer. The four most common contingencies that every home buyer needs to work through are; Home inspection, appraisal, financing, and home sale contingencies (a buyer making an offer on a new home before selling his existing home, making that sale a contingency of the contract). Theres also inspection and disclosure contingencies that are critical as well.

Contingencies are important to both sellers and buyers. They're benchmarks, timestamps in the transaction process that show each party where they stand. As contingencies are lifted, the seller is guaranteed the buyer is satisfied on each specific issue or matter.

The bottom line is that contingencies are there to protect against big risks for both buyer and seller and ensure progression in the transaction. 

 continue learning   "What if the contingencies are not lifted on time?"

                                   "What is earnest money and how does it work?"