Real Estate Terms: Contingencies

Hi. Welcome or welcome back. I’m Cassie Villela, I’m a Realtor®, investor, and property manager in San Antonio, Texas.

I’m starting a new series about terms we use in the real estate industry, defining them for newcomers, and explaining some of the basics in real estate: purchasing, selling, investing. Watch the video or read on below to learn about the various contingencies in residential contracts in Texas.

https://www.youtube.com/watch?v=2kZzBFZykJs

Contingencies

Contingencies are parts of a contract that allow you as the buyer in a real estate transaction to leave the transaction and still get your earnest money back. So contingencies let you break the contract without repercussions. There are a few different types of contingencies. The tricky thing is that they vary from state to state, so even though you may be very experienced in investing or buying real estate in another state, if you’re coming to Texas, you’ll find we do things differently.

Initial Option Period

Other states have inspection contingencies, but in Texas we do not. The way we address the inspection contingency is by giving the buyer an option period. There is a part in the one-four family contract that most realtors use, which allows you, the buyer to propose an option period to the seller, and gives the seller an option to accept it. Typically, it’s about 7-10 days, and you pay for the option period; a certain amount per day, usually $10. In a hot market, some people will bump that up. It’s not uncommon to pay, rather than $100 for a 10-day option, people may pay $250 or more for a five day option. It’s something that may make your offer a little bit stronger. In a seller’s market, you tend to pay more for the option period. In other words, you are paying for the right to have that first period of time where you can back out of the contract for any reason. You don’t have to disclose the reason. You can just say that you are exercising your right to cancel the contract.

The way it works is that the option period starts the day after you sign the contract. Then you would arrange various inspections (like roof, termite, home, etc.), and get all those done during the option period so you have time to cancel the contract if it turns out something is wrong with the property.

It’s also when the bulk of the negotiating takes place because, in most properties, the inspection will find something wrong with the property, so you can go back to the seller to negotiate repairs or perhaps the seller gives you a concession, or lowers the price. That all happens during the option period and that is the main contingency we have in regular residential transactions in Texas.

Financing Contingency

Financing Contingency is another common contingency. There are two levels of Financing Contingencies.

1. Buyer Approval. That part of the third part addendum states that if you, as the buyer, can not get approved for the loan for any reason within a set number of days, you can cancel the contract without repercussions. Usually that is between 10-20 days, and again, it gets more aggressive in a seller’s market.
2. Housing Approval. There may be times the house can not get approval. For instance, if the appraisal comes in low, or if something about the house is not acceptable to the lender, say, the roof is not acceptable.

Those are the two main contingencies in Texas. There are other ones, for instance, if the buyer has to sell their current home, Sale of Other Property Contingency. There are others but the two main ones are Initial Option Period and Financing Contingency. I hope that helps. If it did, please remember to Like, Subscribe and if you have suggestions for videos you’d like to see, please leave a comment below.