What Is Contingency in Real Estate?

Every contingency question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. An agent writes an offer that omits the financing contingency her buyer client asked for, and the buyer forfeits a $9,000 deposit when the loan is denied. The duty most clearly breached is:

   • ALoyalty
   • BConfidentiality
   • CAccounting
   • DReasonable care and diligencecorrect

   Why: Skill, competence and attention to the client's instructions in preparing documents fall under reasonable care and diligence, and a careless drafting error that costs the client money breaches it. Loyalty concerns conflicts of interest rather than sloppiness.

   Agency

2. 2. A contingency in a purchase and sale agreement is best described as:

   • Aa condition that must be met before the parties must close.correct
   • Ba penalty imposed on whichever party delays the closing.
   • Can optional clause that loses all effect once the contract is signed.
   • Da promise by the broker to locate a replacement property.

   Why: A contingency suspends the duty to perform until a stated condition is satisfied or waived, which is what gives a party a lawful exit instead of a breach. It becomes fully operative on signing and it is not a penalty provision.

   Contracts

3. 3. A buyer contracts at $400,000 planning a 20% down payment, with an appraisal contingency. The appraisal comes in at $385,000 and the lender will lend 80% of appraised value. If the buyer proceeds at the contract price, how much cash is needed beyond the planned down payment?

   • A$3,000
   • B$12,000correct
   • C$15,000
   • D$20,000

   Why: The lender advances 80% of $385,000, or $308,000, so the buyer must cover $92,000 of the $400,000 price instead of the planned $80,000: an extra $12,000 in cash. The $15,000 appraisal gap is the tempting wrong pick; only the extra equity above the original down payment is actually required.

   Contracts

4. 4. A contingency inserted for the sole benefit of the buyer may be:

   • Aremoved by the seller if the buyer is slow to act.
   • Bwaived only by court order after a hearing.
   • Cwaived by the buyer, who may then proceed with the purchase.correct
   • Dwaived only with the written consent of both parties.

   Why: The party a condition protects is free to surrender that protection and perform anyway, which is exactly what waiving an appraisal or inspection condition means. The other party cannot waive or strip away a protection that was never theirs to give up.

   Contracts

5. 5. A financing contingency in a purchase contract functions legally as:

   • AA covenant that survives the closing indefinitely
   • BA condition precedent to the buyer's duty to closecorrect
   • CA liquidated damages clause limiting the seller's recovery
   • DA condition subsequent that discharges the seller after closing

   Why: A financing contingency is a condition precedent to the buyer's duty to close, because the duty to perform never ripens unless the loan is obtained. A condition subsequent that discharges the seller after closing describes an event that ends an existing duty, which is the reverse of how a financing contingency operates.

   Contracts

6. 6. A buyer signs a written waiver of her inspection contingency but has not yet completed the inspection. What is the legal effect of the waiver?

   • AIt preserves the buyer's right to cancel if the inspection later reveals defects
   • BIt removes that condition, so the buyer must perform regardless of what an inspection would have showncorrect
   • CIt converts the contingency into an express warranty by the seller that the property contains no defects
   • DIt is unenforceable because contingencies cannot be waived

   Why: Waiver removes that condition, so the buyer must perform regardless of what an inspection would have shown. Believing it preserves the buyer's right to cancel if the inspection later reveals defects misunderstands waiver, which is precisely the surrender of that right.

   Contracts

7. 7. A buyer's appraisal contingency required cancellation notice by April 5. The appraisal came in $22,000 low on April 2, but the buyer sent notice on April 9. The seller refuses to release the deposit. The buyer's weakest argument is:

   • AThe low appraisal itself automatically terminated the contract without any noticecorrect
   • BThe seller waived the deadline by continuing to negotiate after April 5
   • CThe seller suffered no prejudice from the four-day delay
   • DThe parties orally extended the deadline by mutual agreement

   Why: The claim that the low appraisal itself automatically terminated the contract without any notice is weakest, because a notice-based contingency requires the buyer to act within the stated window. Arguing the seller waived the deadline by continuing to negotiate after April 5 is at least a recognized theory that depends on the seller's conduct.

   Contracts

8. 8. A buyer dies two days before a scheduled closing on a signed, fully contingency-free purchase contract. The general rule is that:

   • AThe contract terminates because death ends all obligations
   • BThe contract becomes an option held by the heirs
   • CThe seller may keep the deposit and relist without further obligation
   • DThe contract survives and is enforceable by and against the buyer's estatecorrect

   Why: A binding land sale contract survives and is enforceable by and against the buyer's estate, since the interest is not personal to the buyer. Saying it terminates because death ends all obligations confuses the rule for offers and personal service contracts with executed purchase agreements.

   Contracts