COLUMNS / PROPERTUNITIES

       
 

What Are Contingencies?

(And How Might They Save My Butt?)

Anytime you enter into a real estate transaction, you will inevitably have any number of inspections done during the escrow process, as well as get your loan in order and have an appraisal done on the property. Contingency periods are the time frames during which you are expected to get these things done in order to move on to closing the sale. The beauty of contingencies is that in most situations, they are your out should the deal start to go south for you, or if your lender is not able to get your loan approved.

You will always, always, always need to have inspections done on any property you purchase, no matter what anyone tells you. Inspections are one of the most crucial parts of buying property, and it is up to you to do your due diligence and inspect everything that might need to be inspected to your satisfaction (always by licensed inspectors only). This can include a general inspection, as well as sewer and chimney inspections (the big three when purchasing a single-family home). Depending on the subject property, though, you could have any number of additional inspections, ranging from a pool inspection to a heat and air inspection to a geological inspection.

What inspections you have performed is at your discretion (with possible guidance from your Realtor). But the time you have during which to perform these inspections is limited to the contingency period that was agreed upon between you and the seller in the original purchase contract. The California Association Of Realtors purchase contract has a standard 17-day contingency period written into it, but that is negotiable. Depending on the size of the property, many times a seller will negotiate that time down, with the view that no one needs 17 days to inspect a condo, for example.

In matters of multiple offers, where a potential buyer needs some competitive edge, it can often help you slightly against the competition to cut your inspection contingency down to seven, 10 or even 14 days. The seller wants to know as soon as possible that you are locked in, and your removal of the inspection contingency is a huge step towards that guarantee for them. Thus, the quicker you can offer to lift that contingency, the happier and more comfortable they will be selecting you as a buyer.

This time period is your time to decide once and for all, now that you know all of the facts about the property (because you’ve done your inspections), whether you wish to move forward with the purchase. In California, during the initial inspection contingency period, a buyer can, in theory, back out of the sale for any reason whatsoever, including cold feet. In most cases, cancelling within this time frame entitles the buyer to a full refund of the three percent earnest money deposit they submitted to escrow when the offer was accepted.

An inspection contingency is not your only contingency. The other two major ones that require your attention during a transaction are loan and appraisal. These, along with your inspection contingency, run in tandem, not concurrently. In other words, all three begin the day after acceptance of the offer. The amount of days in the contingency period refers to calendar days, not business days.

A loan contingency is, like inspection, written standard as 17 days in the C.A.R. purchase agreement, and like the inspection contingency, can be negotiated. Back in the heyday of the market, when anyone with a heartbeat could get a loan, I often saw loan contingencies cut down to as little as seven days. I personally do not ever recommend to my clients cutting that down from the 17 days in the current lending climate. I rarely see full approval within the full 17 days for my buyers, let alone less.

The final of the three main contingencies most buyers have is the appraisal contingency. With this, the lender has the agreed upon amount of time (also 17 days according to the C.A.R. contract, but negotiable like the rest) to have a licensed appraiser out to the property to perform an appraisal. The purpose of this is to ensure the lender the property is worth at least what you are paying for it. If the appraisal comes in below the purchase price, the price might have to be renegotiated, or a second appraisal done. During this period, should the appraisal fall short and a solution not be reached with the seller, the buyer may cancel the escrow, again with a full refund of their three percent good faith deposit.

So, now you know what a contingency period is. But why are they important, and what happens if you don’t perform and release your contingency periods within the time allowed by the contract? Well, it can depend. Are you actively working to get your inspections done? Are you negotiating in good faith with the seller over a request for repair or credit? Is your lender still waiting for final approval, or still trying to meet a couple of conditions before that final OK comes through? Then the seller might be willing to grant you an extension if they believe you are doing everything you can. Are you completely non-responsive and failing to keep the seller and their agent informed? Well, then you might have a problem.

If this is the case, expect a Notice To Perform from the seller. When a NTP is issued, you typically have 48 hours from when you receive it to do whatever it is you aren’t doing (usually lifting contingencies). If you continue to be nonresponsive or don’t perform, the seller has the right, should they wish, to cancel the escrow, citing breach of contract on your part. At that point, your three percent deposit (tens of thousands of dollars) is on the line, you are at risk of losing it to the seller and there could be legal ramifications as well. Not what you want!

Please don’t hesitate to call me if you have any real estate-related questions, or if you know someone who is planning to buy or sell real estate in the near future. I’m here to help!

Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries
at [email protected] or facebook.com/jeffersonhendrickrealtor.

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