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Real Estate with Nina Brown
HOME BUYER
CONTINGENCIES
What Is A Contingency?
A contingency is defined as a clause in a real estate purchase that allows a Buyer (or Seller) to cancel a purchase agreement based upon the happening of a certain event. By default, all of the California Association of Realtors (C.A.R.) purchase agreements contain contingencies for loan, appraisal, title, disclosures and investigations.
Some examples of when a Buyer may exercise contingencies.....
A Buyer cannot obtain a loan; is dissatisfied with the property’s condition after an inspection; property does not appraise at a certain value, a deadline for the offer is not met, or there is an issue with insurability and/or affordability.
The Broker recommends, and many residential purchase agreements DO contain contingencies that will allow Buyer(s) within a specific time period to cancel or re-negotiate a purchase.
Some examples of when a Buyer may exercise contingencies.....
A Buyer cannot obtain a loan; is dissatisfied with the property’s condition after an inspection; property does not appraise at a certain value, a deadline for the offer is not met, or there is an issue with insurability and/or affordability.
Some contingencies can be points to negotiate, while others are more for informational purposes and are considered standard in real estate contracts.
What Is The Timeframe For Contingencies?
By default, the inspection contingency period is 17 days per the Residential Purchase Agreement (RPA-CA). However, timeframes are negotiable. In the Bay Area, most Sellers will conduct pre-sale inspections and make those reports and other disclosures available to the Buyer before a buyer makes an offer. The Seller does this to cut down, or perhaps entirely eliminate the Buyer’s inspection contingency period.
By default, the loan and appraisal contingency period is 17 days per the Residential Purchase Agreement (RPA-CA). However, I recommend that the Buyer discuss and rely on the expertise of their lender partner for advice as to how much time they will actually require for their underwriting team to obtain and approve an appraisal. As well as fully approve the Buyers loan. This timeframe is cannot be determined or guaranteed by your agent, as it determined by the Buyers lending team.
Removal Of Contingencies
Under the California Association of Realtors (CAR) purchase agreements, all contingencies must be removed in writing and signed off. Until that happens, the Buyer (or Seller) will retain a right to cancel based upon the open contingency.
Do Contingencies Expire?
Don’t the contingencies expire after the negotiated and agreed upon amount of times agreed upon?
Yes and no.
The contingencies are not waived automatically after the agreed upon days. However, elapse of the negotiated and agreed upon period allows the Seller to deliver a Notice to Buyer to Perform (NBP).
The Notice to Buyer to Perform (NBP) gives the Buyer two days (unless a different number of days has been negotiated and agreed upon) to remove contingencies. If the buyer does not remove their contingencies at this point, the Seller may exercise their right to cancel.
Can A Buyer Cancel For Any Reason When There Is An Open Contingency?
No. The cancellation right depends on the contingency.
For the loan contingency, the Buyer will have the right to cancel if they are unable to qualify for the designated loans.
For the appraisal contingency, the Buyer may cancel if the property does not appraise at the agreed upon purchase price.
The investigation contingency is the broadest contingency. It includes inspections of the physical attributes of the property, such as a home inspection, lead-based paint inspection, and wood pest (termite) inspection, and more. The investigation contingency also gives the Buyer the right to check out the neighborhood, crime statistics, schools, the availability and cost of insurance, permits, zoning requirements, proximity to shopping, restaurants, and bike paths to name a few, and other conditions that may affect Buyer’s property use. It gives the Buyer the right to cancel if they are in good faith dissatisfied with the condition of the property or any matter affecting the condition of the property.
Buyer Cancelation or Request for Repair During an Open Investigation Period
What if a Buyer wants to cancel the contract, or request for a Seller to make a repair during an open Investigation period?
If Buyer has a good faith dissatisfaction with the property or any condition affecting it, the Buyer may cancel the transaction during the investigation contingency period.
A Buyer may also use the Request for Repair (C.A.R. Form RR) to request that Seller repair defects before close of escrow, lower the purchase price, or give Buyer a credit toward the purchase price. In order to entice Seller to agree to Buyer’s requests, buyer may agree to remove the investigation contingency in order to continue with the transaction if Seller agrees to Buyer’s requests. Buyer’s requests may trigger a back-and-forth negotiation over the extent of the repairs, credits or price adjustments, as well as the conditions attached to the agreement – for example the Seller may ask the Buyer, or the Buyer may offer, to remove all contingencies or additional contingencies such as loan and appraisal, rather than just the investigation contingency if agreement can be reached on Buyer’s requests.
A Seller has no obligation to respond to a Buyers Request for Repair.
Forms RR, Seller’s Response and Buyer’s Reply to Request for Repairs (C.A.R. Form RRRR), or Amendment of Existing Agreement Terms (C.A.R. Form AEA) may be used for this type of negotiation.
IMPORTANT: The contingency period sets the outside time to reach agreement, not the starting date on which Buyer needs to make repair, price or credit requests.
BEST PRACTICES-
- Buyers should determine which home inspector they would like to use prior to writing an offer so that once an offer is accepted the Buyers do not waste valuable contingency removal time finding an inspector.
- Buyers should review the completed inspection report with the inspector.
- Buyers should discuss with their agent the consequences of removing contingencies, attempting negotiations, and cancellation.
- Buyers should not wait until the final days of the contingency period to conduct investigations or request repairs. This is a time sensitive matter.
What If a Buyer Properly Cancels Based Upon An Open Contingency.
Do They Lose Their Deposit?
No. The Buyer should be entitled to retain their deposit. Since the Buyer has the right to cancel, it should not a breach of the contract. And since it is not a breach, the Seller should not be able to claim damages.
However, it is important to remember that your agent is never able to guarantee or provide you assurances that you will get your deposit back. Ultimately, if a Seller is refusing to release the deposit from escrow (a neutral third party), the dispute may go to court or arbitration.
If a Seller cancels after delivery of a Notice To Buyer To Perform (NBP), is the Seller entitled to keep the Buyer's deposit?
No. The California Association of Realtors (CAR) contacts are very clear on this point. A Seller who cancels after delivery of a Notice To Buyer To Perform (NBP) must authorize the release of the deposit back to the Buyer. (Refer to paragraphs 14C(1) and (2) of the Residential Purchase Agreement RPA-CA).
The most typical scenario in which the Seller might retain the deposit is if the Seller cancels for failure of the Buyer to close escrow after the Buyer has removed all contingencies. In that situation, the Seller should be delivering a Demand to Close Escrow (Form DCE), not an NBP.
What Is A Non-Contingent Offer?
A non-contingent offer is when a Buyer releases (gives up) some or all of their contractual rights.
In a competitive market Buyers will sometimes feel compelled to write offers with few, or even no contingencies at all. Other times Buyers will offer to remove contingencies within a short period of time. It is not uncommon in a “hot” market, for listing agents and/or Sellers to insist for a Buyer to submit an offers with no contingencies.
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What Happens If You Waive Your Contingencies?
EXAMPLES:
If you waive, or when you release (give up) your loan contingency, if you cannot obtain a loan, whether it is your fault or the lenders, and as a result, you do not or cannot purchase the property, you may legally be in default under the contract. If you default you may be required to pay damages and/or forfeit some or all of your deposit to the Seller.
If you waive, or when you release (give up) your Appraisal Contingency, if an appraiser (be it your own or your lenders appraiser) determines that the the property is worth what you have negotiated to pay for it, as a result your lender may not loan any or some portion of the amount needed for the purchase. The Seller has no obligation to reduce the purchase price to match the appraised value. As a result, if you do not or cannot purchase the property, and you have removed your appraisal contingency, you may legally be in default under the contract. If you default you may be required to pay damages and/or forfeit some or all of your deposit to the Seller.
If you waive, or when you release (give up) your Buyer Investigation Contingency, if you later disapprove of some aspect or condition of the property, and as a result, you do not purchase the property, you may legally be in default under the contract. If you default you may be required to pay damages and/or forfeit some or all of your deposit to the Seller. The Investigation Contingency may include things like the ability or affordability to insure the property, the neighborhood, permit history, property use, local schools etc.. It is imperative that you investigate what is important to you and your situation early in the process. As a result, if you do not purchase the property, and you have removed your investigation contingency, you may legally be in default under the contract. If you default you may be required to pay damages and/or forfeit some or all of your deposit to the Seller.
NOTE: Even when you make an offer without an investigation contingency or you remove this contingency, the Seller may still be obligated to disclose to you material facts about the property.
In some cases, upon receiving this information the law allows you an independent right to cancel for a limited period of time.
Is There Risk When Writing A Non-Contingent Offer?
Yes, there is inherent risk in writing a non-contingent offer. The Broker recommends that Buyers do not write non-contingent offers and if you do so, you are acting against the Broker’s advice. Only after careful consultation and deliberation with a Qualified Real Estate Attorney can you as a Buyer determine and decide how much risk you are willing to take. WRITING A NON-CONTINGENT OFFER IS YOUR DECISION ALONE AND CANNOT BE MADE BY YOUR BROKER OR REAL ESTATE AGENT.