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Contract contingencies give the buyer and seller the right to back out of the contract if these conditions (contingencies) are not met. According to a monthly survey of REALTORS®, 91 percent of closed sales in August 2017 had contract settlement contingencies, up from 60 percent in December 2012, according to the August 2017 REALTORS® Confidence Index Survey.
The common contract settlement contingencies are related to passing home inspections (19 percent), the buyer obtaining financing (19 percent), and appraisal contingencies (15 percent).
These contingencies are reflective of the risks buyers face when purchasing a home and are meant to protect buyers against these uncontrollable, but anticipated, risks. Financial contingencies indicate that buyers continue to face a potential problem obtaining credit and obtaining credit in a timely manner. Appraisal contingencies are reflective of the ongoing home price appreciation in many markets. Appraisal contingencies protect the buyer by ensuring that the property is appraised for a specified minimum amount. If the appraised value is higher, the buyer will need to obtain a bigger loan or put down a larger downpayment so if he cannot do so, then the appraisal contract contingency kicks in and the buyer does not need to proceed with the purchase.
What this means to REALTORS®: REALTORS® need to understand the risks buyers face and to protect buyers from these anticipated risks.
