Think of the word
"contingency" as akin to "if." When a homebuyer signs a
contract agreeing to the purchase of a home, she is saying, "I agree to
purchase this home for this amount of money if …" The "if" is
the contingency.
Contingencies are those
items that must come to pass before the sale finalizes. The list of possible
contingencies is endless – you could tell a seller that you'll purchase his
home if his dog turns into a pig, sprouts wings and flies away. You could do
that, although you probably wouldn't get the house.
Contingencies in a real
estate contract also represent steps along the way that allow the buyer to back
out of the deal without losing her earnest money deposit or incurring a
lawsuit.
Contingencies may be
scattered throughout a contract. Let's take a look at some of the more common
real estate contract contingencies.
Loan Approval
This is generally the
first contingency listed in the contract. For instance, in the California
Association of Realtors® Residential Purchase Agreement, it is on page 2,
paragraph H(2).
It begins by stating that
the buyer must act "diligently and in good faith" to obtain the loan
described on the previous page. "Obtaining the loan(s) specified above is
a contingency of this Agreement unless otherwise agreed in writing."
This particular contract
goes on to mention that obtaining and providing a deposit, and payment of the
down payment and closing costs, are not considered contingencies, but buyer
obligations. At the end of this clause is a standard 17-day time period to
remove this contingency, but the buyer is free to shorten or lengthen this time
period in a space provided on the form.
The loan approval
contingency is one that the seller's agent will scrutinize when first going
over your offer, and for good reason. The seller will be removing his home from
the market if he accepts your offer and taking a chance that your loan will
come through. The longer you take to get loan approval, the longer his home is
off the market. If you end up being denied the loan, the seller has lost
valuable marketing time.
Most contingencies work
this way: Even if the contract states a time period, the buyer can choose a
time frame that is more to her liking and hope the seller is OK with it.
Home Inspection
The home inspection
offers the buyer an opportunity to determine, through the help of a
professional, if there is anything wrong with the home's structure and major
systems. It is a visual inspection only, so don't plan on finding out if
there's something brewing behind the walls.
Most inspection
contingencies state that you have the right to back out of the contract if the
results of the inspection aren't satisfactory. Others may state that you can
back out if the seller refuses to remedy any problems. Decide ahead of time how
you want your inspection contingency worded.
If the inspection turns
up items in need of replacement or repair, you can ask the seller to fix the
problems, todeduct the cost of the
repairs from the price of the house, to credit you back the money to fix them
(if the lender allows this) or you can walk away from the purchase and receive
your earnest money deposit back.
In some parts of the
country, other inspections are customary, such as wood-destroying pest
inspections in California and subsurface sewage treatment system and well
inspections in Minnesota. Each of these represents a contingency.
Sale of the Buyer's Property
It's often an immense
juggling act to sell one house before you close on another. In these cases,
buyers frequently make the purchase of the new home contingent on the
successful sale of their current home.
Whether a seller will
accept an offer with this contingency depends on a number of factors. In a
seller's market this contingency is typically rejected. When there are few
buyers competing for homes, however, sellers are more motivated to accept
less-than-ideal offers.
The seller's personal
situation may play into his decision as well. If he needs to sell his home
quickly, he may reject your offer, or counter it, asking for the contingency to be removed from
the offer.
Inspection of HOA Documents
If the property you hope
to purchase is in a community with a homeowners association, you will be
provided with a mountain of documents. These include, but aren't limited to:
Covenants, Conditions and Restrictions
(CC&Rs) - These include pet
policies, parking rules, rules for the use of on-site amenities, exterior
décor, landscaping restrictions and more.
The HOA Budget - This includes important information about where the
money goes and whether the reserve account contains enough money to meet
emergencies.
HOA Board Meeting Minutes - The meeting minutes will let you take a peek behind the
scenes and find out what type of issues the board generally deals with, what
actions they have taken against homeowners, and if there has been any
discussion about raising fees or levying special assessments.
Governing Documents - Sometimes called bylaws, these documents let you know
how elections are run, how a homeowner can go about getting a seat on the
board, and the length of each member's term.
You'll need the time to
read through each document carefully, especially to determine if there is any
pending litigation against the HOA or the developer. If there is, your lender
may deny the loan.
Ensure that you are
provided adequate time to either read the paperwork yourself or have your
lawyer go over it.
Appraisal Contingency
Unless you are paying
cash for the home, the appraisal contingency is second in importance only to
the loan approval contingency. The appraised value of the home represents the
maximum amount of money the lender will give you. If the lender's appraiser
determines that the home isn't worth what you've agreed to pay for it, you have
several options:
Increase the amount of
your down payment to reduce the loan amount.
A combination of the
first two; the seller reduces the price and you add more cash to meet the
appraised amount.
Ask for a new appraisal.
This only works if the appraiser made mistakes or if you or the seller can add
information that the appraiser didn't take into account.
Walk away from the
purchase.
Your real estate agent is
your best source of information on the various contingencies in a real estate
contract. Follow your agent's advice about staying on task during the process
so that you can formally remove the contingencies by the dates specified.
Your Local San Diego Real Estate Expert,
