This may seem like a boring topic, but it’s crucial for both buyer and seller to understand the contingencies involved in a standard real estate transaction. In the Portland Metro, there are SIX primary contingencies for a typical residential transaction.
What is a contingency, you may ask? In a real estate transaction, a contingency refers to a clause in a purchase agreement specifying an action or requirement that must be met for the contract to become legally binding. We have contingency clauses in a real estate contract to account for the unknown. For example, a buyer may offer to purchase a home at a set amount with the assumption that they can see the assets and flaws. But once inspected by a professional, they may uncover expensive repairs that would alter the price they would be willing to pay.
Another example would be if a buyer was laid off during the transaction. Without the income from a job, they may no longer qualify for a loan. Basically, the contingencies give a buyer an “out” if something changes the ability or desire to continue with the purchase.
What is an Earnest Money Deposit?
In every transaction I’ve worked on, the Buyer fronts an Earnest Money Deposit (EMD) to show they are serious about the purchase (this is a deposit on their down payment or the full purchase if it’s a cash buyer). The EMD is generally refundable if a contingency fails - so the buyer isn’t risking their money to buy a house if one of the contingencies fails.
In highly competitive, multiple offer situations, some buyers will make their EMD non-refundable. This shows how serious the buyer is about buying - and gives the seller more security. It’s risky, but in the “Unicorn Years” of 2021-2022, this happened A LOT. Buyers were willing to make a lot of concessions in the hopes of getting their offer accepted. In many cases, people were removing and waiving contingencies as well. Let’s dive into the common types of contingencies in a real estate transaction.
REAL ESTATE CONTINGENCIES IN OREGON (2024)
Seller’s Property Disclosure
In Oregon, all sellers are required to complete a standard “Seller's Property Disclosure” form. The form asks 200 lines of questions and it is the sellers responsibility to answer truthfully and explain any responses with an * on a separate addendum. The buyer has 5 business days to review and can revoke their offer within this time period if there is anything on the disclosures they don’t like. Note that a buyer can revoke their offer anytime before receiving the Seller’s Property Disclosures (so it’s a good idea for the seller to provide them right away!).
Lead Based Paint Disclosure
Another required disclosure (if the home was built prior to 1978) is the Lead Based Paint disclosure (LBP). This form basically informs the buyer if the seller is aware of lead based paint or not - and provides any details they have. Most sellers are unaware that their home has tested positive for lead. The buyer has 10 calendar days to accept this addendum and may also elect to terminate the transaction based on the information provided by the seller.
Title Insurance
Yes! This is also a contingency. Most title reports we see are fairly routine - nothing out of the ordinary. But if there was something odd that gave a buyer pause, they have 5 days (unless stated otherwise) to review the policy and inform the seller of any concerns in writing. Then the seller has 5 days to remedy the situation. If nothing is brought up, it’s assumed everyone is OK with the Title Report.
To be clear, most people are not canceling transactions based on the above contingencies - but they COULD. In a competitive market, buyers often waive their right to cancel based on these disclosures. Again, this provides the seller with greater peace of mind.
Inspection Contingency
This may be one of the most important contingencies - and the reason many buyers elect to back out of a transaction. The Sales Agreement will stipulate how much time the buyer has to do their due diligence and what inspections they expect to perform. In Portland, we tend to perform 4 primary inspections: home inspection, sewer scope, radon testing, and oil tank locate (and soil samples, if needed). This allows the buyer to learn unexpected things about the house and determine if they still want to buy it. Oftentimes, the parties will negotiate new terms based on the findings. This is usually a combination of repairs, credits or a price reduction. However, if they cannot come to mutually agreeable terms, the buyer may terminate the transaction and receive a refund of their EMD (unless they have waived that right!).
Sometimes the seller provides inspection data (either from their purchase, another buyer who terminated or pre-inspections), but it’s always a good idea for a buyer to do their own due diligence.
Financing Contingency
The financing contingency protects the buyer in the event that they no longer qualify for a loan (primarily for losing their job - but could be other factors). The other big financing hurdle is the appraisal. If the buyer is financing their purchase with a mortgage, the lender generally orders an appraisal to determine if the home has the value of the purchase price. The appraiser is also looking for red flags that could indicate the home is not a sound investment (old roof, peeling paint, foundation issues, etc). If the home appraises for a lower value than the purchase price, the buyer has the opportunity to negotiate the price or terminate and receive a refund of their EMD.
Sometimes the appraiser may make the loan conditional on repairing/replacing certain things in order to proceed. This is also something that would be negotiated. If the seller is unwilling to make the conditional repairs, then the buyer may cancel.
Note that the parties have 2 days (unless stated otherwise in the sales agreement) from learning of a financing failure to either come to a new agreement or terminate the contract.
Contingent Sale
What is a contingent sale? This is when the buyer wants to purchase a home, but it’s contingent on their home selling first (because they need the funds from the sale to complete the purchase). There are two levels of this contingency:
The buyer's home is either not yet on the market, or is actively listed for sale. This contingency requires a separate addendum outlining the timeline involved (example, home needs to be in contract within “X days”). This can be somewhat complicated and only a patient (or desperate) seller would consider this type of offer (because of the inherent uncertainty)
The buyer's home is under contract. This simply requires a line in the sales agreement indicating the address of the home and when it is expected to close. The more contingencies that have been removed from the buyers sale, the better.
The sale contingency has been off the table for a few years; during the “Unicorn Years” it was close to impossible to buy a home with a contingent sale attached. When the market is cooler - or a home has been sitting for a while without any bites, it’s a great opportunity for a buyer to submit their contingent offer.
One of my most complicated (but oddly smooth!) transactions involved a buyer who submitted a contingent offer on my client's house (I had the listing) and then my buyer submitted a contingent offer on their new home! So we had 4 parties involved and stacked the closings so everyone could use their money to purchase their next home. This requires a lot of close communication with the team (I affectionately named this situation the “Beech Street Threesome”).
Of course, if any of the previous contingencies fail, the whole thing can come crumbling down (in the example above, if buyer 1 did not/could not buy house 1, then buyer 2 and seller 2 would have to re-negotiate). Yet another reason why a seasoned agent with magnificent communication skills is essential (Example: Kate Fulford).
SPECIAL CONTINGENCIES
There are additional contingencies which apply to different types of properties as well:
Condominium/HOA
If a buyer is purchasing a condo/townhouse managed with an HOA - there is a contingency time period to review the documents and determine if they are comfortable with the CCRs, Insurance, Reserve Reports and any proposed or current assessments (the buyer checks the documentation they want to see when submitting an offer and the timeline begins once all documents have been delivered).
Multi-Family
When purchasing an investment property (such as a duplex, triplex, fourplex or commercial building), there is an addendum for reviewing the various documents including rent rolls, leases, capital improvements, P + L, repairs, etc. Again, the buyers submit a checklist of what documentation they want to review when an offer is submitted.
In closing, there are several ways a buyer can terminate a transaction and receive their earnest money deposit back. However, these contingencies can also be used as tools to make an offer more appealing to a seller. A great agent can help you evaluate the situation based on the circumstances, the condition of the property (and how badly you want it), your risk tolerance, and more.
Please reach out if you have any questions or thoughts about real estate contingencies in Oregon!