The Ins and Outs of Contingency Removal

Some of my clients ask me," What is a contingency?"

 It is a condition that needs to be removed by one of the parties in a contractual agreement before the contract can be enforced. It allows certain conditions, agreed to both parties, to be satisfied by one or more of the parties in the contract or to cancel the agreement, without losing the earnest money in a purchase agreement. It may also be a condition to keep the Seller from being forced to sell the home to the Buyer. It might allow for the original contract to be amended, or extended.

What are some of the contingencies that might apply to a purchase agreement?

Loan Contingency: Further investigations concerning the property or the borrower could result in a loan denial.

Home Inspection: Buyers have the right to hire a home inspector and conduct a complete inspection of the home. If buyers requests repairs from the home inspection, the repairs are negotiable. All reports are to be given to the Seller, even if paid for by the Buyer, unless the standard type in the purchase agreement is changed. Do not ask for the reports from the vendors, they have a contract only with the person paying for the reports. The reports are to be given through the agent.

Insurability of the Home by the Buyer's Insurance Company : They will research past claims, determine liability with a drive by or even inspect the home. This should be done during the inspection period specified in the contract.

Lead Inspection: Federal laws gives all buyers 10 days to inspect for Lead-based Paint. Many homes built before 1978 contain lead-based paint.

Wood Destroying Pest Inspection: This may include Dry Rot and other wood destroying organisms, not just termites.The contract should specify who will pay for the Pest Inspection and  whether outbuildings or garages are covered in the inspection.

Roof Inspection: Many home inspectors will not walk on a roof due to possibility of damage and / or liability if the roof is damaged. Some buyers hire a roofing company to conduct a roof inspection. This may include inspection of  gutters, roofing material, including correct flashing and sealing of vents.

Sewer Inspection: Sewers/ Septic systems can get clogged from tree roots or deteriorate over time. Plumbing companies can insert a camera into the sewer/ leach line to check for damage during an inspection. The septic inspector may check the tank, leach lines, pump the tank, report code violations, degree of function, recommend repairs, disclose size and condition of tank and components.

Radon, Mold or Asbestos Inspections: Depending on a visual inspection, sometimes home inspectors will call for additional inspections by licensed entities to check for special situations such as radon, mold, and asbestos.

Early Occupancy Agreements: Contracts can be contingent upon the buyer and seller entering into a written agreement that allows the buyer to rent the property prior to close of escrow. It is a good idea to include the rental agreement attached to the purchase agreement with a form made for that.(PPA) Or provide a statement in the Purchase agreement, under other terms, that an rental agreement will be agreed upon within 5 days of the accepted offer. Be sure to use a date within the inspection period in order to eliminate an open contingency that they may not be able to be resolved and unnecessary costs for inspections will have been spent by one or both parties.

Private Well Inspections: If the home is not connected to city water  it may be on a well, spring, or other source of water. Buyers may want assurance that the water is potable and meets lender conditions. Every County has tests that a Buyer can choose from that are specific to their County issues. Some are high minerals that corrode plumbing, some are for mining areas, most are for bacteria, and other possible contaminants. Taste can be adjusted in most cases with special equipment. Softeners, filtration systems, and other additives. These additions are added expenses and on going maintenance for a new buyer to consider.

Preliminary Title Report: Title investigations will disclose easements, CC&Rs, and monetary liens of record, including the ability of the seller to transfer clean title the buyer.

Homeowner Association Documents: Buyers should obtain for approval a copy of all home owner association documents, including meeting minutes, costs, projected future increases,and any other restrictions, if applicable.

Seller Statutory Disclosures: Sellers are required in CA to disclose all known material facts, including preparing and delivering a Transfer Disclosure Statement (TDS), Natural Hazard Disclosure Statement, special taxes and statutory supplemental and/or questionnaire.

Contingent on Selling Existing Home: Buyers who have an existing home might want to buy before selling. The Sellers who accept contingent offers like this often give the buyer a certain number of days to perform. If the buyer cannot perform, the seller retains the option to cancel the contract.

 These are just a few of the many contingencies to be negotiated in a contract.

The inspections are not intended to find conditions that cancel a deal. The home is expected to be in good repair or have repairable issues. A Seller is wise to do as much as possible before a Buyer is shown the home to avoid cancellation of a contract. The average Buyer is not a contractor and does not have the skill, nor often the time, to remodel and repair before moving in. Unless you drop your price significantly, the Buyer will choose a home with less surprises. Inspections are to give the Buyer peace of mind.

Contingency removals are very important to understand, as they can decide if a deal succeeds or fails. Have you have wasted time and lost other Buyers while holding on to an escrow that may fall apart without any compensation of the Buyer's earnest money?

How is a contingency removed?

The basic concept is that the buyer must remove all contingencies in writing using C.A.R. (California Association of Realtors) Contingency Removal Form or other company form that clearly outlines the removal and performs the objectives of the party filling it out. Using this form you can decide if you want to only remove certain contingencies or all contingencies as a whole.

If the seller wishes to have a contingency ( such as finding a replacement property) they must remove the contingency in writing before the Buyer can proceed with the purchase.The Seller may or may not close escrow on the replacement property before the close of the current escrow with the Buyer. They have to remove their contingency of finding the replacement property with the details spelled out and agreed upon. It may be after a purchase agreement has been signed on the replacement property ,after they release their contingencies on that property, or after the close of that escrow (if they have the funds to do it before the close of the current escrow and if the Buyer can wait that long). There is usually a time frame that allows the Buyer to cancel within or the Seller to choose to move forward without finding a property to buy.. A contingency can stay within the contract until it is removed in writing or the close of escrow.

If a contingency is not removed at the end of a contingency period, in writing, the contingency will still remain. If a buyer removes all contingencies and then discovers a material defect in the property he may be entitled to withdraw from the contract without penalty, even after removing the contingencies. If it was a material fact that affects the value or desirability of the property and was not disclosed or discovered through the other inspections that were performed it may allow the Buyer to rescind the contract. All contracts could be argued in court, but in most cases the Buyer is protected by the lack of disclosure by the Seller.

What can a seller do?

A seller can give the buyer a notice to preform. You can give the buyer a notice to perform at least 2 days before the contingency period ends but no sooner. If the buyer does not comply and remove the contingencies then you have the right to demand cancellation of the contract, but must return the buyers deposit.

There are a few terms such as "active removal" or "passive removal". The term " Active removal" when talking about a contingency means the party must do something to remove a contingency. Typically this means removing the contingency in writing. For " passive removal" of a contingency , the contingency party need do nothing. The contingency is automatically removed with passage of a specific amount of time.

Failure to give a notice to perform at the appropriate time could cost a Seller time off the market and loss in sale price as the market declines. Of course in this market you do not want to loose a buyer so you want to be flexible and communicate the need to stay in contract. There can be a fine line between pushing paperwork to secure the deposit, thus tightening up the escrow, or running a buyer off. You need a professional real estate agent to help you through the ins and outs of contingency removal.

If you are ready to list or to buy a property, give me a call.

Janet Fullmer/ Broker

Network Real Estate: 530-277-5138