What is a Contingency?
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Think of the word “contingency” as comparable to “if.” When a homebuyer signs a contract accepting an agreement to purchasing a home, she’s saying, “I agree to purchase this house for this amount of money if …” The “if” is the contingency.
Contingencies are those things that must happen before the deal finalizes. The list of potential contingencies is endless – you may notify a seller that you will purchase his house if his dog turns into a hog, sprouts wings and flies away. You could do that, although you probably would not purchase the house.
Contingencies in a real-estate contract also represent procedures along the way that permit the buyer to back out from the deal without losing her earnest money deposit or taking on a case.
Contingencies could be scattered within a contract. Let’s take a peek at some of the more established real estate contract contingencies.
Loan Approval
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This is generally the first contingency listed in the contract. For example, in the California Association of Realtors® Residential Purchase Agreement, it is on page 2, paragraph H(2).
It begins by proclaiming that the buyer should act “diligently and in good faith” to have the loan explained on the preceding page. “Obtaining the loan(s) specified above is a contingency of this Agreement unless otherwise agreed in writing.”
This certain contract continues on to note that acquiring and providing a deposit, and payment of the down payment and closing costs, usually are not considered contingencies, but buyer obligations. At the conclusion of this term is a standard 17-day time period to clear out this contingency, but the buyer is free to shorten or lengthen this time period in an area available on the form.
The loan approval contingency is actually one that the seller’s agent might examine when first talking about your offer, and for good reason. The seller will be eliminating his home from the market if he will accept your offer and taking a chance that your loan will get through. The more time you take to get loan approval, the further his home is off of the market. If you wind up being denied the loan, the seller has shed important marketing time.
Many contingencies function this way: Even if your contract states a time period, the buyer can choose a timespan that’s more to her preference and hope the seller is fine with it.
Home Inspection
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The home inspection offers the buyer the chance to figure out, through the help of an expert, if there’s anything wrong with the property’s construction and major systems. It’s a visual inspection only, so don’t intend on trying to find out if there is something brewing at the rear of the walls.
Many inspection contingencies claim that you have the right to back out of the contract if the results of the inspection are not satisfactory. Others may suggest that you can back out if the seller refuses to fix all issues. Decide in advance how you want your inspection contingency worded.
If the inspection presents items in demand for replacement or repair, you can ask the seller to remedy the problems, to deduct the cost of the repairs from the value of the house, to credit you back the money to fix them (if the lender permits this) or consider walking away from the purchase and receive your earnest money deposit back.
In some areas of the country, other inspections are traditional, 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
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It’s often an enormous juggling act to sell one property before you can close on yet another. In these instances, buyers frequently make the purchase of the new home dependent on the successful sale of their present home.
Whether a seller will accept an offer with this contingency depends upon a number of factors. In a seller’s marketplace this contingency is usually rejected. When there are few buyers competing for homes, however, sellers will be more encouraged to accept less-than-ideal offers.
The seller’s personal situation may play into his choice as well. If he has to sell his house rapidly, he may decline your offer, or counter it, asking for the contingency to be removed from the offer.
Inspection of HOA Documents
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If the property you want to purchase is within a community with a homeowners association, you’ll be provided with a mountain of documents. These are, 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 a lot more.
The HOA Budget – This includes important information about where the cash goes and whether or not the reserve account contains sufficient funds to fulfill emergencies.
HOA Board Meeting Minutes – The meeting minutes will enable you to take a look behind the scenes and discover what type of difficulties the board usually handles, what measures they have taken towards homeowners, and if there’s been any discussion about raising fees or levying specialized assessments.
Governing Documents – Occasionally called bylaws, these documents inform you of how elections are run, how a homeowner can go about getting a seat on the board, and the length of every member’s term.
You will need the perfect time to read through each file carefully, especially to find out if there’s any pending lawsuit against the HOA or the developer. If there is, your lender may reject the loan.
Ensure that you are offered sufficient time and energy to either read the paperwork on your own or have your lawyer go over it.
Appraisal Contingency
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Unless you are paying cash for the property, the appraisal contingency is second in significance only to the loan approval contingency. The appraised price of the property signifies the most money the lender can provide. If the lender’s appraiser figures out that the home isn’t worth what you’ve agreed to pay it off, you’ve got several options:
Ask the seller to lessen the property’s cost to the appraised value.
Raise the amount of your deposit to reduce the amount borrowed.
A combination of the first two; the seller reduces the price and you add more cash in order to meet the appraised amount.
Ask for a new appraisal. This only works if the appraiser has made errors or if you or the seller can provide important information that the appraiser didn’t take into consideration.
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 to enable you to officially remove the contingencies by the dates specified.
Irene Medina and The Medina Real Estate Group have vast experience in marketing of properties extensively worldwide via the internet. They sell their listings in record time and for top dollar and sometimes for above market and appraised value. They have received many recommendations from their extremely satisfied clients and customers. Irene Medina has been a Floridian for the past 22 years and has been a Broward County resident for 21 years. Irene and The Medina Group service, Plantation, Fort Lauderdale, Coral Springs, Parkland, Davie, Weston, Tamarac, Broward County and South Palm Beach. She has been a Silver medal winner with Keller Williams for the past 3 years. She is a Certified Residential Specialist, CRS, Certified Distressed Property Expert, CDPE, she is also a Graduate of the Realtor Institute, GRI. She also holds the following designations, SFR, CHS, TRC and is working on her Commercial RE accreditation.
Irene and The Medina Real Estate Group will “Stand by YOU Every Step of the Way!” from start to finish.
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Irene Medina / Realtor The Medina Real Estate Group
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