What You Need to Know About Contingencies
Today I want to talk about contingencies, the biggest protection that buyers have when purchasing a home. There are seller contingencies as well, however, I’m going to do this video from the perspective of the buyer because California real estate documents are written heavily in favor of protection of the buyer. Once the seller accepts an offer, basically they have to go through with the sale of the home unless the buyer does something that puts them in breach of contract. But the buyer, well they have lots of different types of contingencies that at various stages of the process, they can say, “Nope, I’m declining to purchase this property” and they get their deposit money back, no questions asked. Think of them as safety nets for various things that the buyer has to do to make sure they are prepared to purchase the home.
First off, what is a contingency? A contingency is a condition that must be fulfilled before the sale of a home can close. In California, these conditions and the time periods for those conditions are spelled out in the Purchase Agreement.
One very very...and I can’t stress this enough, very important thing about contingencies is that they are NOT passive, and they must be removed in writing. That means, whatever time periods you’ve set aside for each contingency, nothing happens when you reach that day, or the day after, or the day after that, unless you remove your contingencies in writing. It’s not common, but you can even close on a property with contingencies still in place. Now, if you do go passed your time period, the seller can issue you a notice to perform, which means you have two days to remove or exercise a given contingency if you are past the removal date, but you’ll never hit a situation where it’s like, whoops we forgot about removing that contingency, guess it just disappears. Nope, never. Like I said, buyers are very protected with California real estate documents.
Ok so let’s talk about the contingencies themselves. Real estate contingencies typically fall under three major categories, I call them the Big 3: inspection, appraisal, and loan contingencies. These are the main contingencies for a buyer because they directly involve something that the buyer has to do. Most of the other contingencies fall under an umbrella of “disclosures and reports” which are mostly things that the seller has to deliver to the buyer to review. If they don’t like anything in those disclosures or reports, they can exercise their contingency, but there’s nothing in those realms for a buyer to do on their end but read and understand the information.
Let’s start with the Big 3 then, and I’ll get into the other ones later. By the way, if you happen to like videos like these, hit subscribe, follow, etc, whatever platform you’re on, that way you can stay up on all sorts of great information related to Los Angeles real estate. Ok so let’s start with the inspection contingency, sometimes called due diligence or investigation period. It’s your responsibility as a buyer to investigate every single aspect of the property that you want to find out about before you purchase the home. Sometimes we only got 15 to 30 minutes to take a look at a home when you first viewed it and of course, you can’t take a look at every little thing during that time period. Additionally, there are some things, for example the sewer, or maybe the roof of a two story house, that you literally cannot see at all during a showing.
So, the buyer has a period which they get to do all of the inspections that they want. Normally we think about bringing out licensed professionals for things like a general inspection, termite inspection, sewer inspection, roof inspection, foundation inspection, etc etc. Maybe you test for mold, or asbestos or have someone look at the chimney. If there’s a pool, you’ll take a look at that as well.
But you should also do things that you might not think of, like drive the neighborhood at various times of the day, take a look at crime reports for the area. I’ve even encouraged buyers to knock on the door of the neighbors to get a quick feel for who they will live next to. All of these things are important and if anything isn’t to your liking, you can exercise your inspection contingency and decline to purchase the property, and receive your deposit back in full. This is also your period where you can negotiate the request for repairs, and if that negotiation isn’t successful, you can exercise your inspection contingency.
Next up is the appraisal contingency. I have an entire video on the appraisal contingency and I’ll probably do another one since it’s on everyone’s minds right now in this market but here is the short of it. When you have a loan, the lender has to order an appraisal which is an independent third party evaluation of value. If the appraised value matches the purchase price, great! You’ve appraised and you can remove this contingency. If the property does not appraise, you must make up that difference by either having the seller lower the purchase price, the buyer putting additional money as down payment, or some combination of those two. If you are not able to reach that agreement in the event of a low appraisal, you may exercise your appraisal contingency and decline to purchase the home.
Finally, the loan contingency. If you don’t have the cash to purchase a home, you’ll need a loan, and thus, if for some reason you can no longer get that loan, you can’t purchase the property. Thus, there is the loan contingency for that scenario. Now, the loan contingency is kind of for freaky one off type things, it’s very rare that it is exercised. That’s because if you went through the proper steps of getting a full preapproval, a lender has already evaluated your ability to get the loan and, barring anything changing, you should have no issues doing that when it comes time to close.
However, if something crazy does happen, like say you lose your job, or have a pay cut or something, you may no longer qualify for the loan. It’s for that reason you have the loan contingency in place to protect you and you don’t have to purchase the home.
Let’s talk about the remaining contingencies under reports and disclosures. You’ll get many different disclosures about various things affecting a property from natural hazards to lead paint, retrofit requirements, etc etc. I couldn’t list them all here because that would be a video in itself, but most of these are standard state disclosures that are the same for every property sold in California. However, the unique ones are seller disclosures where the seller is required to tell you about anything that they know is wrong with the property. That’s a big one, if they tell you someone has died on the premise, or that the roof leak wasn’t repaired or something big, you can back out and get your deposit back.
Additionally, if you’re buying a condo or a townhome, the seller pays for you to get all of the HOA documents, everything from the CC&Rs which are basically the HOA rules, to the meeting minutes and the financials for the HOA. If you don’t like anything in there as well, maybe the HOA doesn’t have enough reserves, or they don’t allow pets and you have a dog, you can back out as well. There are contingencies for the preliminary title report which shows the ownership chain, and there if you spot any easements that you’re not ok with, you can back out as well.
Finally, you have the sale of buyer’s property which can become a contingency if you need to sell a home to buy this one, but in our market of Los Angeles that is very rarely used. Sellers usually don’t accept offers from buyers that need to sell a home because generally, there’s enough buyer demand to not have to take that risk and get tied up with someone’s other sale.
At a certain point in the transaction, usually around the 17 to 21 day mark, you as the buyer will remove all of your contingencies. The seller wants to make sure everything that needs to happen will happen, and you removing your contingencies says, “yes indeed, I’m moving forward with purchasing this home and it’s going to happen no matter what.” At this point is the only time where the buyer could be in danger of losing their deposit. If you have removed all of your contingencies and you have a change of heart, if you decide not to buy the home, it’s quite likely the seller will keep your deposit, which is 3% of the purchase price. So that’s why I always have a talk with my buyers before we remove that last contingency to just say, “you totally completely 100% sure you want to buy this house? Because this is the point of no return without penalty”. Usually at this point though, the buyers are happy with the house, the price, and the state and are excited to remove that final contingency and wrap things up so they can get those keys!
So that’s a little bit about contingencies in the state of California. One cool thing about contingencies, again being heavily in favor of the buyers, is that if something comes up that is unforeseen by the buyer and not disclosed by the seller, usually some type of abnormal situation, if it is a material fact that could affect the buyer’s decision to purchase the home, an additional contingency is created for that thing, even if you have removed all your contingencies. For example, if you’re non contingent and you find out the HOA has pending litigation that was not disclosed upfront, an additional 3 day contingency is created for that specific issue. But of course, that’s only for things that are unforeseen or not disclosed up to that point.
Ok there you have it! Thank you for watching, I hope you learned something about contingencies, and if you did be sure to like and subscribe, and if you found this valuable, I’d incredibly appreciate you sharing this video with someone that could benefit by connecting with me. It’s super simple, and on my website there’s a button to Book A Consultation that connects directly to my calendar.
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