Contingencies…. They’re Back

Sellers and most REALTORS today are looking back on the halcyon days of an overheated seller’s market with multiple offers, waived contingencies, and over asking sales.  Life was good, and simpler, at least for sellers. 

But now contingencies, like Jason in the Halloween franchise, are back.  And some sellers and REALTORS are having to adjust to the new reality.  Many offers today have one or more contingencies included in the terms, so a brief refresher on contingencies is in order.

There are 3 main contingencies in the standard real estate contract (Purchase Agreement).  Contingencies are for the protection of the buyer.  They are conditions that must be satisfied before the buyer removes the contingencies and elects to move forward. 

The appraisal contingency is the most straight forward.  It simply says that if the property fails to appraise for at least the sales price, the buyer can cancel the agreement and get their deposit back.  It protects the buyer against overpaying for the home, and/or being forced to bring in more money to cover any shortfall.   In the market we are currently in with downward pressure on prices, we are not seeing too many issues with this, as the recent sold properties likely closed at higher prices.  If the appraisal does come in lower than the sales price, the buyer may come back to negotiate a lower sales price to reflect the appraised value.  However, the seller is not required to accept a lower sales price

The loan contingency essentially states that the purchase is subject to the buyer obtaining final loan approval from the lender.  If the buyer for some reason is unable to obtain final loan approval, then they may have the right to cancel the agreement and get their deposit back.  The contract can include a clause stipulating the maximum interest rate for the buyer, so if the rate exceeds the stated maximum rate the buyer can also cancel the agreement.  However, if the buyer takes action that causes the lender to deny the loan, intentionally sabotages the loan, or does not cooperate with the lender, then the buyer’s deposit could be at risk.  The buyer needs to make a good faith effort to obtain full loan approval. 

The inspection contingency is a due diligence period for the buyer to examine all aspects of the property, including title documents, inspections, disclosures, HOA documents, and other items related to the condition of the property.  The buyer is also able to order and review any new inspections they deem necessary.  At the end of the inspection contingency, the buyer can elect to move forward or cancel the agreement. It is at the buyer’s discretion.  They don’t need to provide any reason, evidence, or explanation to the seller.  However, the tenants of good faith are still in play, so if the buyer acts in bad faith by cancelling their could be a challenge to the release of the deposit.  This in practice is very hard to prove, and can be very expensive to pursue.

Also related to the inspection contingency is the Buyer Request for Repair.  The buyer may request the seller complete repairs or take other corrective action.  The buyer can submit a request for repair any time during the contract, even if there are no contingencies.  The seller is not required to agree, or to even respond to the request.  But if there is an inspection contingency, and there are repair items that become apparent, the buyer will often request these repairs.

There are other possible contingencies for the sale of the buyer’s property or the seller locating or closing on a replacement property, but those have more to do with the buyer’s ability to purchase or the seller’s ability to deliver the home.  As always, should you find yourself in a dispute over contingencies you should seek the advice of a qualified California real estate attorney.

In uncertain market conditions like this, you need a true professional to guide you.  Call me today and let’s talk about you and your real estate needs.