3.2 Contingencies and Inspections

What a Contingency Does

A contingency is a condition written into the contract that must be met (or waived) before the parties are obligated to close. Until a contingency is satisfied or removed, the buyer generally may exit and recover the earnest money. Kentucky's standard purchase contract bundles several contingencies, each with its own deadline.

Financing contingency in practice

The lender will not loan more than the appraised value. Suppose a buyer is approved for an 80% loan-to-value mortgage on a $300,000 contract. If the appraisal comes in at $285,000, the lender bases the 80% on $285,000 = $228,000, leaving the buyer to cover a $15,000 shortfall in cash, renegotiate, or — if an appraisal contingency exists — terminate and recover earnest money.

Sale-of-property contingency and the kick-out clause

When a buyer's offer is contingent on selling their current home, the seller's property is effectively off the market. A kick-out clause lets the seller keep marketing; if a second buyer appears, the seller notifies the first buyer, who typically has 24–72 hours to remove the contingency (prove non-contingent financing) or release the contract.

Inspections and Kentucky Environmental Hazards

Radon: the high-stakes Kentucky fact

Kentucky sits over uranium-bearing limestone and karst, so radon is widespread; many counties are in the EPA's highest-risk Zone 1. The EPA action level is 4.0 picocuries per liter (pCi/L) — at or above this reading, the EPA recommends installing a mitigation system, typically sub-slab depressurization costing roughly $800–$2,500. Radon is the leading cause of lung cancer among non-smokers, so testing is strongly advised even though Kentucky does not mandate it on every sale.

Lead-based paint (federal overlay)

For any home built before 1978, the federal Residential Lead-Based Paint Hazard Reduction Act requires the seller to give the EPA pamphlet, disclose known lead hazards, and offer the buyer a 10-day period to conduct a lead inspection. The agent must ensure the disclosure is signed; failure exposes the agent and seller to federal penalties.

Buyer's Options and Deadlines

After the inspection, the buyer may accept as-is (waiving the contingency), request repairs, request a price/closing credit, or terminate if material defects appear. The seller may agree, counter, or refuse — and a refusal returns the decision to the buyer.

A missed inspection deadline is a frequent exam scenario: if the buyer does nothing by the cutoff and the contract says the contingency is automatically waived, the buyer is bound to purchase even with defects later discovered.

Appraisal gaps and how buyers respond

When an appraisal comes in below the contract price, three responses are common, and the exam expects you to know all three rather than assume termination is the only option:

• Renegotiate the price down toward the appraised value, which the lender will accept because the loan is sized off the lower number.
• Pay the difference in cash — the buyer brings the appraisal gap plus the down payment to closing.
• Terminate and recover earnest money, but only if an appraisal contingency is in the contract; a buyer who waived it to win a bidding war is on the hook for the gap.

Disclosure interplay

Contingencies work alongside Kentucky's seller disclosure duties. A buyer who learns of a defect through the seller's disclosure form, then independently confirms it during the inspection period, has a stronger basis to request repairs or terminate. Agents should never coach a seller to conceal a known material defect; doing so risks misrepresentation liability and license discipline, and it can void the contract even after closing. Keeping the inspection contingency, the disclosure, and any repair amendment in a single written file protects everyone if a dispute later arises.