Contingency Removal

Why are contingencies so important? Because as long as you have even (1) one contingency, you may cancel the transaction at anytime and have your earnest money deposit returned. Once all contingencies have been removed, the seller may keep your earnest money deposit as liquidated damages if you default (don’t close).

There are THREE contingencies in the standard purchase agreement:

1.) Loan Contingency

CAR Residential Purchase Contract 3. H (3)

If you are depending on financing with a loan to purchase and the bank denies your loan, this contingency lets you cancel the agreement and get your Earnest Money Deposit back. You may remove your loan contingency once you have received final loan approval from the bank. In my experience, it takes most lender 30 days to get you final approval, so don’t be surprised if 17 days is not enough time. The loan contingency is the last contingency  removed and it usually is removed right before closing.

 

2.) Appraisal Contingency

Appraisal Contingency
CAR Purchase Contract 3. I

If you are buying the property with a loan you will want an appraisal contingency to go along with your loan contingency. Your lender will have an appraisal done on the property in the first two weeks of escrow. If the appraisal comes in for less than your accepted offer price- then that is going to be a problem. You can try to ask the bank to do a reconsideration of value, but in my experience appraisers never change their value- it is easier to switch banks then it is to get a higher appraisal!

Let’s suppose you are in escrow for $500,000 planning to put 20% down, which is $100,000 and the appraisal comes back at $460,000 and now there is a $40,000 gap. There are a few things that can happen. The seller can lower the price to the appraisal price and everything is fine. The buyer can come up with the additional $40,000 in cash, to go on top of the 20% down on $460,000  or $92,000- so that they are now putting $132,000 down (if the buyer has this much extra cash to bring to the deal) or the buyer and seller can try to renegotiate the price and if they can’t come to an agreement cancel. Whatever happens, the appraisal contingency protects you in the event that it comes in short.

 

3.) Inspection Contingency

CAR Residential Purchase Contract 14 B (1)

 

17 days is plenty of time for the inspection contingency. Sometimes inspections can runs long if the seller’s listing agent doesn’t provide you with the seller’s side disclosures on time (termite, prelim, TDS, HOA docs for condos).  The inspection contingency covers you if there are surprises in the condition of the property, like a bad foundation, or a leaky roof. You can either cancel the deal or try to work out an agreement with the seller for any material issues you find with the property with a request for repairs

In multiple offer situations it is common for the seller to shorten the inspection contingency period. They usually want 10 days (sometimes they even write 7!). 10 days is just barely enough time to get everything done. You have to keep in mind that inspectors don’t book an inspection on Saturday or Sunday and they are usually booked up a day or two in advance. Couple that with the fact that they need to take a day to write their report and if their inspection turns up any problems you will need to hire specialist for follow up inspections that will take even more time. Anything less than 10 days I would consider risky for the buyer.

In the old days, contingencies were removed by passive removal. Passive removal means contingencies were automatically removed when the contingency expiration date written into the purchase agreement lapsed. As you can imagine, this led to many law suits!

Today contingencies are removed by active removal. To remove a contingency or contingencies the buyer must do so in WRITING by signing a Contingency Removal form. As long as the contingency removal form has NOT be signed, contingencies remain in effect, even if the contingency period 17 days or whatever was in the contract has passed. I have closed escrows before with all of the contingencies in-effect because the listing agent did not understand what they did or why they should remove them.

Contingency Removal 1
Contingency Removal Form, if A (3) is check- all contingencies are removed

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