Contingencies are clauses that permit one member of the purchase agreement to get out of it if certain conditions aren’t met.
What are the typical contingencies?
Most of the time, it is the buyer who has contingencies. The typical ones we see (when we have them at all) are for these:
- Loan (sometimes called finance),
- Appraisal – this can be either for the purchase price or for a lesser amount, if the contract is the current CAR purchase agreement.
- Property condition. Property condition includes inspections, but is broader than just that. It encompasses anything that would materially impact the buyer’s decision to buy or how much to pay. For example, it could include off site items such as school scores, crime rates, neighborhood issues, etc.
- in some cases, a buyer might want a contingency not for the broader “property condition”, but only for one or more inspections. If the seller’s pre-sale inspection appears sloppy or incomplete, we would recommend this to our clients.
- Approval of documents and disclosures (HOA documents, the Preliminary Title Report and related documents, seller disclosures, and more).
- Sometimes if there are leased or liened items, such as a solar lease, the buyer may have a contingency that he or she is approved to take it over. With solar leases it is extremely important to get that paperwork started just as soon as the buyer is in contract. The solar company may run a credit check, which requires a social security number. A delay in providing this info to the company may cause escrow to run late.
- If there is no preliminary title report provided when the offer is drafted, most buyers would request a contingency to read and accept that report when it is available.
The contingencies listed above are fairly typical for re-sale homes (or used homes). With new construction, often the builder has a different contract than our regular CAR contract, and you’ll need to review it carefully to understand what contingencies, if any, are permitted. Builders’ contracts are normally in the builders’ favor, so tread carefully.
The contingency period
The Contingency Period is the time allowed by your Purchase Agreement to obtain financing, perform inspections and investigations, and satisfy any other contingencies to which your purchase is subject. In our area, the seller ordinarily provides a full disclosure package with inspections upfront, and often buyers waive the property condition contingency. That’s not always the case, though. When there are loan or appraisal or other contingencies, most of the time they range between a few days and 2 weeks.
Some buyers want extremely long time periods. Home sellers often don’t want to deal with that much risk, so it will negatively impact the odds of success. (“Long” is relative, but anything over 2 weeks is considered long in Silicon Valley – and sometimes it’s much shorter than that.)
When the local real estate market is very overheated, it is not uncommon for home buyers to waive all contingencies. We don’t advise doing this as it’s dangerous, but if there are 10 offers and 8 have zero contingencies, we know that including contingencies may make it extremely challenging to get an offer accepted.
Seller contingencies
Sellers may request contingencies, too. The most common seller contingency is for finding a replacement property. The challenge if homeowners want to sell one property and buy another – most do not want to move twice. Or perhaps there is a 1031 tax deferred exchange that is desired and the owner of the property does not feel sure that he or she can get the replacement property figured out during the tight timeframes as required by law to avoid a tax penalty.
The majority of home buyers won’t agree to a seller contingency, though, so it makes selling a home more challenging if it’s demanded for the sale. We do not recommend making that condition part of the seller’s requirements of sale.
