Contingencies and Deal Killers
In an ideal world, a buyer would approach a seller to purchase a home= at full price and pay cash for the property. Unfortunately, not every situatio= n is ideal. With most purchase contracts in real estate, the buyer and seller wi= ll write into the contract contingencies that are designed to protect his or h= er interests in the transaction. A contingency is a section that is inserted i= nto the purchase contract that allows either the buyer or seller a way out of t= he contract if certain events do or do not take place. In this section we will look at many common contingencies that are written into contracts and exami= ne how that may affect your ability to close on the sale of your home.
Contingency #1: The sale of this home is contingent upon the buyer qualifying for a new home loan within five days of acceptance of this offer. Buyer's failure to qualify within this period of time shall void this contr= act and the buyer's earnest money deposit shall be returned in full.
As a seller, accepting an offer from a buyer that is not yet qualified requires you to stop marketing your property and halt the sales process unt= il the buyer qualifies for a home loan. My suggestion is to hold off on the purchase agreement until you have conclusive evidence that your buyer qualifies. If you are eager and are willing to take the risk of the buyer n= ot qualifying, do not leave the process open ended. By inserting a contingency like the one above, you limit the amount of marketing time you could potentially lose by forcing the buyer to take action immediately.
Contingency #2: The buyer has the right, at the buyer's expense, to select a licensed and qualified home inspector and/or other professionals to make inspections on the property...
Though this contingency is usually a lot longer in length, the jest of this clause allows for the buyer to conduct a home inspection. In some form= s of this contingency, the buyer may request that the seller completes certain repairs. Though this usually does not force the seller to complete any or a= ll of the repairs, failure to do so could result in the buyer canceling the contract and receiving his or her earnest money back. Expect to see some ty= pe of inspection contingency in the contract.
Contingency #3: The sale of this home is contingent upon the buyer successfully selling the property located at ________________ before the cl= ose of escrow.
If your buyer currently owns a home, it is very unlikely that he or s= he will want to hold on to his or her existing property while purchasing your home. In most cases, the buyer will use the equity accrued in his or her existing home as a down payment for your home. As a result, that person will need to sell the home before being able to buy your home. Deciding whether = or not to accept an offer where someone needs to sell a home can be tricky. Th= ere are many questions that need to be asked, such as: "Is it currently for sale or have you not put it on the market?", "Is the home overpri= ced for its area?", "Do homes sell quickly in your neighborhood?"= ;, "How long does it take to close on a transaction (assuming the buyer is from out-of-state)?" Other issues can crop up during the process. Does that buyer need to sell his or her home, is that buyer qualified for a home loan, and what happens to you if your buyer cannot sell his or her home? One suggestion employed by sellers that help to compensate for this additional burden on you is to ask for a larger earnest money deposit and stipulate th= at all of it (or a portion of it) is non-refundable. If your buyer is asking y= ou to take additional risks, you should have them take one too.
Contingency #4: The sale of this home is contingent upon the buyer obtaining an appraisal no less than the sales price of the home.
In some cases buyers will insist that this clause is included in the contract. In other cases, it may be an unwritten clause if the buyer is qualifying for a home loan. If you have done your homework properly and pri= ced your home fairly, this clause should not be an issue. If you have not, you could run into trouble. If the buyer is financing the purchase of the home, more likely than not his or her lender will require an appraisal on the property. That appraisal is used as part of the qualifying process because = the lender will base the loan amount on the sales price or appraised value, whichever is less. If the appraisal is less, you may be forced to lower the sales price or require the buyer to come in with additional money to cover = the difference (which they probably do not have and would not agree to do).
Contingency #5: The buyer and seller agree to allow the buyer to t= ake pre-possession of the property ___ days before the close of escrow.
This contingency allows a buyer to occupy a property prior to closing= on the transaction. In cases where a buyer is relocating from another state or where the buyer's lease is expiring, he or she may be under the gun to move before the lender can complete the transaction. As a Realtor, I do not like= my seller's accepting this type of contingency unless certain provisions are provided. The liability a seller assumes by allowing a buyer to take posses= sion before closing on the transaction is similar to that of a landlord. If you = are considering this type of arrangement, be sure to include provisions that re= quire the buyer to have insurance to cover personal belongings, injuries, and oth= er issues that may crop up. Include provisions that address how you are to evi= ct the buyer if the transaction does not close (unless you are looking for a tenant). Check with your insurance agent to make sure that your insurance policy allows for this type of situation. If it does not, you may have to b= uy additional coverage in the event that someone is hurt or if something is damaged.