Description

When you make an offer on a home - you are entering into an enforceable contract.  There are many aspects to that contract that can impact the home-buying process.  In this lesson, I will explain what contract contingencies are and how they can work for or against you when you are looking to buy a home.

Key Points

  • Contingencies = criteria set forth in the contract
  • Set of limitations allows the right to cancel
  • Penalties can be costly
  • Contingencies help set and keep a timeline

Lesson Files

  • Contract Contingencies

    So what are contingencies? When you write an offer on a property – you are essentially creating the first half of a contract. It is the contract document, that if signed by the seller, is in fact an enforceable contract. You’re making commitments in exchange for commitments from the seller.

     

    What are Contingencies?

     

    Contingencies are the set of limitations that allow you the right to cancel that contract, should some criteria – contingency – not be met. So, for instance, you might have inspection contingencies. In California, buyers are very well protected. You have the right to inspect a property and then make your decision. By default, in California, you have 17 days to make a decision, however, that can be changed when you write an offer. You have the right to decide after conducting your inspections whether or not you’d like to purchase the property. You don’t need to offer any explanations as to what you didn’t like – besides, there’s too many variables and it doesn’t really matter. You are given the opportunity, with an inspection contingency, to have use a home inspector, a pest inspector, or maybe even a roof inspector. You can do whatever inspection you want with the understanding that you will be responsible for any damage caused to the property. Basically, you can do all the inspections you need to do to be satisfied that the condition of the property is up to your standards. At the point that you release that contingency, you no longer are able to cancel the contract for that reason without some penalty.

     

    What are Penalties?

     

    The penalty in a contract is usually described, at some point, as a liquidated damage or as some agreed upon amount. In most California contracts the liquated damages are equal to the amount of a deposit. So let’s say that you’re doing your inspections and you release all of your contingencies and then without explanation – you cancel. Well, there’s a very good chance that you could lose your deposit if that was the agreed amount in liquated damages. So the contingencies are the reasons you’re able to cancel a contract without losing your deposit or whatever that agreed upon amount of liquidated damages might be. Now this is going to include things like an appraisal. So if you offer $300K for a home and the appraisal comes in at $280K. Well you have an out in the contract, you don’t have to go forward with the contract because the home didn’t appraise at the amount you agreed upon. However, in all likelihood, you would negotiate some solution with the seller. But that is what allows you, technically in the contract, the right to cancel without a penalty.

     

    Types of Contingencies

     

    Contingencies generally include things like inspections, appraisal, and loan approval. For instance, if you’re unable to get to get the loan you’re able to cancel. But remember at the point that you release those contingencies, you’re abandoning the right to cancel the contract based on those reasons. Therefore, it’s important to stay ahead, while you’re in contract, of those topics that are your reasons for cancelling. This is because you will face a point – some point during the escrow – where you’re going to release those. So you want to know that the inspections have been done and that you’re good with the property – or if you’re not then you’ve agreed to the repairs. You’ve done the appraisal and it came in at value. The loan is approved and you’re feeling solid and confident in the loan. Then at the point that you’re feeling certain and “good-to-go” then releasing the contingencies.

     

    Why Are They Important?

     

    If you delay on those, if you’re not staying ahead of the inspections, and the timelines in the contract come due – the seller is likely to insist that you release contingencies – making your money non-refundable. That’s a very vulnerable place to be. You don’t want to lose your deposit money by releasing contingencies when you don’t know if something has been satisfied. So that’s why it’s so important to stay ahead of the timelines in a contract because the seller’s side is going to monitor those timelines as well and is going to want you to release contingencies at that point in time.

  • Lesson File 2