You’ve found a house you’d like to purchase, and you’re ready to make an offer. It’s time to take a closer look at the purchase contract—perhaps the most important legal document for real estate transactions—and decide how you want to modify its terms, including adding various contingencies.
Contingencies? Yes, it’s an uncommon word. The real estate industry is filled with unfamiliar terminology. A contingency refers to particular provisions in a standard purchase contract. If the condition isn’t met, you’re allowed to back out of the purchase, without penalty.
Contingencies are a good thing, in terms of protecting buyers. They can also backfire if you insist on too many contingencies or are competing with less demanding buyers.
Here are several key points to keep in mind.
1. Know the market.
In a seller’s market (when there aren’t many properties in a specific price range or a particular geographic area for sale), contingencies will encourage sellers to find a more accommodating buyer.
In fact, in a strong seller’s market, some buyers severely limit their contingencies and offer more than the seller’s asking price, potentially triggering a bidding war.
In a buyer’s market (when there are more properties for sale than there are interested buyers), sellers are more likely to accept buyer contingencies.
Don’t know what market your area is experiencing right now? That’s okay. Your Accredited Buyer’s Representative specializes in staying current on that information for your local market. Just ask!
2. Understand which contingencies are common (and which aren’t).
Your buyer’s representative can also provide the best advice on which contingencies are appropriate and commonly accepted in your market. Every area operates under different standards and conventions.
A few examples:
- Home inspection – If something is seriously wrong with a house, you’ll want to know before you buy, not after the closing, when it’s too late to address the issue with the seller. Inspections are primarily designed to evaluate the structural and mechanical condition of a property, although specific conventions vary by market. Inspections may also check for mold, radon, pests, lead, septic systems, or other specific concerns. A home inspection (at the buyer’s expense) is a highly recommended contingency clause.
- Attorney review – The seller, the buyer, or both may request a certain number of days to have their attorney(s) review the contract for sale and the closing documents.
- Mortgage financing approval – Smart buyers secure a pre-approval letter from their lender before submitting an offer. However, your mortgage financing could still fail to reach final approval due to findings in the property inspection, a too-low appraisal, or a final review of your financial situation.
- Approval of homeowner association (HOA) documents – If you are buying a property governed by an HOA, you can request these documents before making an offer to ensure the HOA is on solid financial ground. Alternately, this can be a contingency item.
- Early occupancy (with payment of rent) or furniture move in – If your timeframe requires a critical move-in deadline, such as the start of a school year, you may want to stipulate this as a contingency.
- Appraised value – The appraisal may come in lower than your offer, in which case an appraisal contingency can provide an option to attempt to renegotiate the selling price. Also, note that lenders can reject your mortgage application if an appraisal comes in too low.
- Home warranty – A buyer may make the sale contingent on their ability to secure a home warranty on the property. Be aware that some home warranties require a home inspection before purchase to prove that a warranty claim is not a pre-existing condition.
- Sale of a current home – This contingency requires the seller to agree to delay closing until you’ve found a buyer for your current home. It’s a tall request, especially in a seller’s market. If the contingency includes a “bump” clause or “kick out” clause, the seller can continue marketing their home in hopes of finding another buyer.
3. Watch those dates!
If your contract includes deadlines related to contingencies, be sure to monitor them carefully. Your buyer’s rep will help you stay on top of these too.
Dates matter, since even a one-day lapse could put you in jeopardy of non-performance of your contractual obligations, potentially resulting in the cancelation of your purchase contract and loss of your earnest money.
Add any critical deadlines to whatever calendar system you rely upon, as well as alerts a couple of days before the deadline hits.
“Buyer’s offer has no contingencies.” This phrase has become increasingly common in the Bay Area’s competitive real estate market, where buyers are looking for every advantage to stand out from the crowd. Whether you are the buyer or seller, it is important to know what contingencies are and where to find them in your contract.
In this three-part series, I will explain the typical real estate contingencies and help you identify them in your California real estate contract.
What Are Contingencies in Real Estate?
A contingency is a condition that must be fulfilled before the sale of a home can close. In California, these conditions are typically found in the buyer’s offer. The most common form we use to write an offer is California Association of Realtors (C.A.R.) Form RPA-CA.
Real estate contingencies typically fall under three major categories: appraisal, home inspection and mortgage approval. Think of these contingencies as a buyer’s and seller’s safety net. If a home does not appraise at a certain value, if an inspection reveals a major problem, or if the buyer cannot obtain adequate financing, the parties can back out of the contract without penalty.
In addition to specifying contingencies, your contract will set specific deadlines. For example, the buyer will have 17 days to complete inspections (see below). It will also state when and how notice of cancellation must be given and received.
California’s Inspection Contingency: 14(B)(1)
In California, the default inspection contingency gives the buyer a little more than two (2) weeks – 17 days – to complete all inspections.
C.A.R. Form RPA-CA, section 14(B)(1) reads:
BUYER HAS: 17 (or ___) Days After Acceptance, unless otherwise agreed in writing, to: (i) complete all Buyer Investigations; review all disclosures, reports, lease documents to be assumed by Buyer pursuant to paragraph 10A and other applicable information, which Buyer receives from Seller; and approve all matters affecting the Property; and (ii) Deliver to Seller Signed Copies of Statutory and Lead Disclosures and other disclosures Delivered by Seller in accordance with paragraph 10A.
During this 17-day contingency period (or the timeframe agreed to between the parties), the buyer typically hires independent inspectors to look at the home’s roof, foundation, structure (termites, mold, etc), and any other areas of the home the buyer sees fit. Contact your real estate agent for referrals to trusted inspection professionals.
If any major problems are found, a buyer may then ask the seller to make repairs or may request a monetary credit for repairs at closing – see section 14(B)(2). The seller, however, has no obligation to respond to either request.
Lifting The Buyer’s Inspection Contingency
After the agreed upon inspection period has passed, the seller must request that buyer lift their inspection contingency. If seller does not obtain a contingency removal, buyer’s inspection period remains in effect, “based on a remaining contingency.” See 14(B)(4). This means that technically buyer’s inspection contingency can remain in effect all the way through the deal — meaning buyer can back out and recover any earnest money deposited with escrow.
Sellers, your agent will likely send a “Notice of Buyer to Perform” (NBP) requesting that buyer either remove the contingency or back out of the contract. This will allow you to move on to other back-up offers if buyer fails to adhere to the agreed-upon inspection timeline.
Should I Write a No-Contingency Offer?
Well, that depends. Has your seller already had a professional inspection completed? What did the inspection reveal? Was the foundation adequately inspected? What about the roof? How old is the home? What updates have been recently done by the seller? Were permits obtained for any structural work?
I have represented Bay Area buyers who successfully wrote offers with no contingencies and I have represented buyers whose succesful offers included more contingencies than are typical. No home is the same and I think your offer should reflect your comfort with the home’s condition, your ability to obtain financing (or pay cash), and your overall risk tolerance.
I recommend that buyers do as much due diligence as possible before writing an offer. There is no substitute for being 100% confident in your offer before it is sent on to the seller. This will set the tone for a smooth transaction all the way to the closing table.