Contingency

A contingency is a condition written into a purchase contract or letter of intent (LOI) that must be satisfied before the agreement becomes fully binding. If the contingency is not met, the buyer can renegotiate the terms, adjust the purchase price, or walk away from the deal entirely — typically without penalty. In mortgage note investing, contingencies are the primary contractual tool buyers use to protect themselves during the due diligence period.

How Contingencies Work in Note Transactions

When a note investor submits an indicative bid or signs a loan purchase sale agreement (LPSA), the price is based on data the seller has provided — usually a data tape with loan-level details. That data has not yet been independently verified. Contingencies bridge the gap between the seller's representations and the buyer's confirmed findings by making the deal conditional on specific outcomes.

A typical note purchase includes a due diligence contingency period of 14 to 30 business days. During this window, the buyer reviews the collateral file, orders a title search, verifies property value, and confirms the borrower's status. If any of these checks reveal material discrepancies, the contingency gives the buyer a contractual exit.

Common Contingencies in Note Investing

Where Contingencies Appear

Contingencies can appear at different stages of the acquisition process:

• Letter of intent (LOI) — When submitting a non-binding offer, investors include contingencies that signal the conditions under which they will proceed to a binding agreement. This gives the seller enough information to evaluate the offer while preserving the buyer's flexibility.
• Loan purchase sale agreement (LPSA) — In the binding contract, contingencies are formalized as conditions precedent to closing. The LPSA typically specifies the due diligence period, what constitutes a material defect, and the buyer's remedies if a contingency is not met — including the right to a full refund of any earnest money deposit.
• Indicative bid email — In competitive offerings from professional sellers, buyers often embed contingencies as caveats directly in their bid submission rather than in a formal legal document.

Strategic Use of Contingencies

Experienced note investors treat contingencies as both a protective mechanism and a negotiation tool. Including the right contingencies in your initial offer communicates professionalism and sets expectations for the transaction.

A well-structured contingency offer signals to the seller that you are a serious buyer who will close if the asset checks out — not a tire-kicker looking for reasons to back out. Conversely, a seller who resists reasonable contingencies (such as the right to review the collateral file before funding) is raising a red flag about the quality of their assets or their intentions.

When dealing with exclusive sellers — banks or lenders who are not actively marketing loans on the secondary market — contingencies are especially important because the seller may not have standard representations and warranties in place. In competitive marketplace offerings, many standard contingencies are already baked into the trade process, and experienced sellers expect them.

Contingencies vs. Representations and Warranties

Contingencies and representations and warranties serve complementary but distinct purposes. A contingency gives the buyer the right to verify information and exit before closing. A representation and warranty gives the buyer a post-closing remedy — the right to demand a repurchase or price adjustment if the seller's statements about the asset prove false after the deal has funded.

Both protections should be present in a well-structured note transaction. Contingencies protect you before you wire funds. Representations and warranties protect you after.