What does the term “contingency” mean in a real estate contract?

In the context of a real estate contract, the term "contingency" refers to a condition that must be met for the contract to be binding. This means that certain events or requirements need to occur before either party is obligated to complete the transaction. Common contingencies in real estate transactions include financing contingencies, home inspection contingencies, and appraisal contingencies. Each of these conditions serves to protect the interests of the buyer or seller by allowing them an "out" if certain criteria aren't fulfilled, which helps to mitigate risk in the transaction process.

For example, if the buyer includes a financing contingency, the buyer is not required to proceed with the purchase if they are unable to secure adequate financing. This legal mechanism ensures that both parties have a clear understanding of the requirements that must be fulfilled before the purchase can be completed, making it a crucial aspect of real estate agreements.