Sometimes, Realtors® seem to speak a language all their own. I still remember being a new Realtor® and being completely confused during an office meeting with the acronyms: RPA-CA, CMA, WPA and so on. What in the world did it all mean? And now, I’ll be talking with clients and then look up into their bewildered eyes. Oops, I guess I commit the same cardinal sin: speaking in Realtor-tongue.

So, Just What the Heck are Contingencies?

Dictionary.com defines a “contingency” as a “dependence on the fulfilment of a condition.” In other words, as a home buyer your offer is contingent upon the fulfilment of certain conditions you write into the contract. If any of the contingencies are not fulfilled, according to the terms in the residential purchase agreement, you can back out of buying the home and take your good faith deposit with you. So a contingency is what in the past used to be called “a weasel clause,” as in something that gave you the opportunity to weasel out of escrow in case something didn’t go the way you wanted.

Today, the real estate transaction is less scary to the home buyer. Contingencies are already written into the printed contract used by Realtors®. If you wish not to have contingencies in your escrow, you have to (literally) sign them away.

Specific Contingencies & the Contingency Period

The RPA-CA (Residential Purchase Agreement or Offer or Contract) includes the following contingencies: inspection (and disclosures), loan and appraisal. The first seventeen days of escrow by default is called the contingency period. It is during this time that you will get the opportunity to clear the above contingencies. The home buyer receives all disclosures, schedules inspections, gets a loan and the lender clears the appraisal. If anything is amiss, for instance – if the potential home buyer cannot get a loan, he can walk away from the transaction and get his good faith deposit back from the title company where it is deposited. The same is true of the appraisal, something most home buyers worry about. If the home that the buyer is buying does not appraise for the price on the contract, the lender will, of course, refuse to lend that amount to close. Thus, the buyer can then either choose to cancel escrow or drop the price. Of course, all changes must occur with both parties’ permission.

I also have to mention that with the huge number of bank-owned homes on the market lately, the contingency period has suffered a bit of a contraction. A strong offer during the real estate boom years used to mean a 14 day contingency period – shorter than the 17 default days offered by the purchase agreement. Today, banks are reducing these days even further. I once saw a counter sent by the bank to my clients with the total contingency period shortened to just 10 days. While this reduction limits the number of days the property stays off the market (in case the escrow were to fall through and the house needed to be put back on market) with tougher lending guidelines and escrows and appraisals taking longer, it does severely limit buyer’s rights and can potentially put them in a difficult situation should the lender want more comps or another appraisal, for instance.

How Contingencies are Removed

As with all contractual agreements in California, this too must be removed in writing. At the end of the contingency period, the listing agent will usually ask for this form from the home buyers. It is usually up to the buyer’s agent to keep track of the total contingency days and remind the home buyers that they should remove the contingencies. If they do not, the listing agent can serve them with a “Notice to Perform.” Usually, this means that if the buyers do not remove contingencies, the seller can assume that the escrow has fallen through and – after returning the buyer’s deposit – can put the house back on the market.

Consequences of Removal

Home buyers should be careful, however. Once these contingencies are removed, it is assumed that escrow is going to close. Also, by removing contingencies, the buyers have now handed over their good faith deposit. If – after written removal of contingencies – the home buyers default on closing escrow the sellers retain their good faith deposit as liquidated damages. This default on buying the home could be for any reason, even if their loan fails to go through at the very last minute.

As such, many home buyers will “forget” to remove contingencies in writing. The jury is still out on whether in this case they should get their good faith deposit back. I’ve heard both sides of the story.

Do Contingencies have to Exist?

Contingencies are in place to protect the home buyer. Some people have asked me if there need to be contingencies even if they are making an all-cash offer and the escrow period is greatly reduced. I believe it’s always a good idea to keep contingencies. As a buyer it is your most important asset in buying the home. A lot can go wrong with an escrow, even if you are absolutely certain you will buy the house and do not need a loan. The disclosures could reveal something, or the inspections might find something you would not want to live with. In such cases, the home buyer is relieved to know that he can still cancel escrow and not have lost his deposit. Even if the escrow period is greatly shortened, leave time for inspections and disclosures. Cash escrows can close in two days – yes, I have seen them – but it’s still a good idea to extend that to at least a week and keep three days to clear inspections and disclosure reports. Contingencies are a home buyer’s best friends. Don’t scorn them.

Comments are closed.