REAL ESTATE CONTINGENCIES
Contingencies are a great way to control the sale or purchase of a home, and protect you from a deal that may not be optimal for you. Here are some details about different contingencies to consider.
Financing Contingency:
This contingency states that the purchase of the home is contingent upon the Buyer obtaining financing or a mortgage loan at terms and conditions that are satisfactory to the Buyer. If the Buyer is unable to secure financing within the specified timeframe, they may be able to back-out of the contract without forfeiting their earnest money.
Financing Type Contingency:
This contingency may specify the type of financing the Buyer intends to obtain, such as conventional, FHA, VA, or USDA loan, and may allow the Buyer to terminate the contract if they are unable to obtain the specified type of financing.
Financing and Financing Type Contingencies are great for the Buyer, but what about the Seller. Seller can avoid these contingencies by insisting upon a Mortgage Pre-qualification Letter from a reputable mortgage lender. Check the date on the letter, most expire in 90 days or less. As the Seller, insist upon a current Mortgage Pre-qualification Letter before accepting the Buyer’s offer and signing a purchase agreement.
Appraisal Contingency:
This contingency stipulates that the purchase of the home is contingent upon the property appraising for a value that meets or exceeds the purchase price. If the appraisal comes in lower than the purchase price, the buyer may have the option to renegotiate the price, request repairs, or terminate the contract.
Even without an appraisal contingency, the Mortgage Lender will not write a loan for a home that appraises less than the purchase price, or, the appraisal is less than the loan amount. This can be avoided by the Seller accepting a purchase price for their home at or slightly below market value. Unfortunately, residential real estate pricing is rather subjective, dependent upon those recently sold homes the Appraiser, Realtor, or Seller chooses for comparison.
If the appraised value comes in much lower than expected, you can challenge the appraisal and offer to pay for a 2nd appraisal. Most Mortgage Lenders have a list of approved Appraisers that they will accept; you will need to make this request through the Mortgage Lender.
Sometimes it helps to provide the Appraiser supplemental information to aid in their review and analysis:
· If the actual home square-footage does not match the County records, hire a licensed appraiser to measure and certify the home’s square-footage, and give it to the Appraiser.
· When major systems have been updated, such as: HVAC, Hot Water Heater, or permanent Appliances (range, cooktop, vent hood, dishwasher, etc.). Provide the Appraiser a list of system updates and purchase dates.
· If plumbing has been updated, such as replacing sewer lines, new fixtures, kitchen or bathroom updates, provide this information to the Appraiser.
· Age and type of roofing is an important factor in establishing home value. Especially if you installed hail resistant architectural shingles.
· If your home was upgraded with foam insulation in either the exterior walls or under the roof, e-glass windows, radiant floor heat, back-up generator, solar panels, battery back-up, or other energy efficient improvements, the age and fact that these exist are important factors in home valuation.
· Gutters are easy to recognize, but French drains are not always as obvious while walking around a home. French drains around a house protect it from water damage, shifting soil, and major foundation issues. Make the Appraiser aware of these home features.
· Regular Wood Destroying Insect (WDI) remediation and warranties enhance the value of a home. Provide a recent report or receipt from a licensed exterminator.
Home Inspection Contingency:
This contingency allows the Buyer to conduct a professional home inspection to assess the condition of the property. If the inspection reveals significant defects or issues that were not disclosed by the Seller, the Buyer may have the option to request repairs, negotiate for a lower price, or terminate the contract.
Being a proactive Seller, you can have the home professionally inspected prior to listing on the market. Then have 2-3 general contractors provide an itemized quote to repair each item in the inspection report. This empowers you to decide which items to repair prior to listing, or provide copies of the general contractor quotes along with concessions to the Buyer’s offering price.
Sale of Other Property by Buyer Contingency:
If the Buyer needs to sell their current home in order to purchase the new one, they may include a Sale of Other Property by Buyer contingency. This contingency allows the Buyer to back out of the contract if their existing home does not sell within a specified timeframe.
As a Seller, accepting a Sale of Other Property by Buyer contingency can be risky, yet secure a contract to purchase your home. This is not an uncommon practice, but as a Seller you should consider and insist upon the following:
· What is the average time on market for current home sales in the Buyer’s neighborhood. This information is readily available from any Realtor.
· How long has the Buyer had their home on market. If it has already been longer than the average time on market, you may not want to accept a Sale of Other Property by Buyer contingency.
· Get the following from the Buyer’s Realtor:
o Pricing plan. A pricing plan should include the initial asking price, and pricing reduction schedule over time. Make sure the schedule has asking prices and dates the Buyer and their Realtor have agreed upon, and that the Realtor follows the pricing plan.
o Marketing plan. Where will the Realtor advertise the sale of the Buyer’s home, what frequency will the ads appear, and over what period of time. A sale of a home that is not aggressively marketed will not sell as fast.
o Extend the contingency period to the Buyer’s average time on market, and make the earnest money non-refundable. Time is money, and you taking your home off the market should come at a cost to the Buyer.
o Minimum earnest money should be between 1-3% of the purchase price. A lessor priced home at the higher 3% rate, and a higher priced home closer to the 1% rate.
Make the Pricing and Marketing Plan part of the Sale of Property by Buyer contingency; this can be done by attaching a copy of the Pricing and Marketing plans as an additional addendum to the contingency addendum. If either plan is not followed, then the Seller has the right to terminate the contract early, due to breach, and retain the earnest money.
Title Contingency:
This contingency states that the Buyer's purchase of the home is contingent upon receiving clear and marketable title to the property. If any title issues arise, such as liens, easements, or boundary disputes that may require an extended period of time beyond the closing date, the Buyer may have the option to terminate the contract.
The Seller should be aware of any liens or clouds on title. Under unusual circumstances, clouds on title can be filed with the County without the owner’s knowledge. As the Seller, you can pre-qualify and insist upon the Title company to use to sell your home; doing this has certain advantages. Foremost, you can have the Title company perform a title report prior to receiving a contract for purchase. This report will reveal any clouds on title. You may have to pay for the report up-front, but then be subsequently adjusted-for at closing, provided that the time between this preliminary report and closing is relatively short; verify this with the Title company before ordering the report.
Homeowners Association (HOA) Contingency:
If the property is part of a homeowners association, the Buyer may include an HOA contingency that allows them to review the HOA documents, rules, and regulations before proceeding with the purchase. If the Buyer finds the HOA terms unacceptable, they may have the option to terminate the contract.
Insurance Contingency:
This contingency allows the Buyer to obtain satisfactory homeowner's insurance coverage for the property. If the Buyer is unable to secure insurance or the rates are significantly higher than expected, they may have the option to terminate the contract.
Lead-Based Paint Contingency:
If the property was built before 1978, the Buyer may include a lead-based paint contingency that allows them to conduct a lead-based paint inspection or receive proper disclosures from the Seller. Federal Law and Texas includes ADDENDUM FOR SELLER’S DISCLOSURE OF INFORMATION ON LEAD-BASED PAINT AND LEAD-BASED PAINT HAZARDS, for any home built prior to 1978. If lead-based paint hazards are found, the buyer may have the option to negotiate repairs or terminate the contract.
Most homes built prior to 1978 will contain lead-based paint. This is difficult to remediate without removing exterior siding, sheetrock, doors and trim from the home. The alternative is to remove flaking or chipping paint and apply a sealant. Epoxy paints are the best sealants, but primers (Zinsser or Kilz) are known to perform well at sealing pre-existing paint.
Governmental or Environmental Contingency:
This contingency allows the Buyer to terminate the contract if the property is subject to any governmental or environmental regulations or restrictions that are unacceptable to the Buyer, such as zoning changes, short term rental restrictions, wetland designations, or environmental hazards.
With the advent and popularity of Short Term Rentals (STR) and municipalities invoking strict ordinances controlling STRs, zoning has become more important with home Buyers. As a Seller, research the zoning and STR ordinances that control your home’s zone, and include it in the advertising of your listing. Either way, this will either attract Investors or tentative Home Owners, depending upon the planned use of the home.
Attorney or Due Diligence Contingency:
In some states or jurisdictions, Buyers may include a contingency that allows them to review and approve all legal and due diligence documents related to the purchase, including contracts, disclosures, and reports. If the Buyer's attorney or due diligence review uncovers any issues, they may have the option to terminate the contract.
Radon Contingency:
This contingency allows the Buyer to conduct a radon test on the property and request remediation or termination of the contract if radon levels are above acceptable limits.
Mold Contingency:
This contingency allows the Buyer to conduct a mold inspection and request remediation or termination of the contract if mold is found to be present in the property.
Septic or Well Contingency:
If the property has a septic system or well, the Buyer may include a contingency to inspect and approve the condition and functionality of these systems before proceeding with the purchase.
Termite or Pest Contingency:
This contingency allows the Buyer to conduct a Wood Destroying Insect (WDI) inspection, that includes termite, beetles, ants or other pests and request treatment or termination of the contract if WDI or pest damage is found.
Survey Contingency:
This contingency allows the Buyer to obtain a survey of the property to confirm property boundaries, easements, and encroachments before proceeding with the purchase.
Home Warranty Contingency:
This contingency allows the Buyer to request a home warranty from the Seller, which provides additional protection against potential defects or issues with the property after the purchase. This is common with homes that have been recently built – but do not include a manufacturer’s warranty, or homes that have been rehabbed or contain major renovations.
Since home inspections can be limited in effect, Home Warranties are a great selling point at a nominal cost. If the Buyer requests a Home Warranty, consider the cost of a Home Warrant while negotiating the final price of your home.
The above consists of the most common contingencies that a Buyer may request before placing a contract to purchase on a home. Contingencies are a way for a Buyer to protect themselves from the unknown. Proactively considering and being prepared for these contingencies as a Seller, puts your home in a better selling position than the average home seller. Review each of these with your Realtor before listing your home, and determine which remedy will best suit your position if they arise.
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