The short answer is “contingencies.” In simple terms, a contingency in a real estate contract means that the buyer or the seller has to do something in order for the contract to move forward.
If you a buyer or seller and are part of a real estate contract, you absolutely need to understand the various contingencies that are part of the contract. Not only do you need to understand what contingencies are in the contract, but how long they are in play and how they are to be removed.
In a typical residential contract in California today, the following contingencies are included.
- Review of disclosures and reports.
- Home inspections (physical inspections of the property).
- Loan approval for the buyer.
Other contingencies that could be added include:
- Sale of buyer’s property.
- Seller to find replacement properties.
Before I go forward let me give my “disclosure”. In real estate, a contract is generally considered binding when the contract is in writing and money (earnest money deposit) is exchanged. The contract can be written on the back of an envelope! But the vast majority of the time, we are going to be using the contracts that are provided by the California Association of Real Estate (CAR).
For each of these contingencies there is a time period that is specified in the contract. The days start after we have a fully executed contract.
When we reach the end of that specified time period, usually the buyer has to “remove” that contingency in writing!!!! I find that this point is very misunderstood by our clients. In the older versions of the contract, once we got to the end the contingency period, the contingency was “removed”. In other words the contingency was passively removed. But in the current version of the residential contract provided by the CAR, one of the parties in the contract must sign a document removing the contingency. If they do not, the contingency period is extended until they remove that in writing.
Now another “Frank Valente disclosure about contingencies”…. If you are in a commercial contract or using a contract that is not provided by the CAR, what contingencies that are part of that contract, how long they are in effect, and how they are removed, can vary SIGNIFICANTLY. For example the contingencies may simple be removed when the time period expires.
At this point, you may be confused. But as I stated earlier, if you are in a real estate contract make sure you absolutely understand not only what contingencies are in the contract, but how long they take effect, and how they are removed.
Let us go back and take a look at each of the typical contingencies with respect to the current contract recommended by the CAR.
- Review of disclosures and reports: Typically the seller has 7 days to provide the buyer with any disclosures, inspections, or reports that the seller has available.
- Home inspections (physical inspections of the property): As part of the contract, the buyer will have a negotiated amount of time to complete their inspections. Usually the amount of time is anywhere from 7-21 days. At the end of the specified period, the buyer has to remove the contingency in writing. This contingency may get extended for a couple of reasons. For example, after the home inspection is completed, the home inspector may recommend additional inspections. Maybe there may be structural issues with the property. Maybe a separate roof inspection may be appropriate. Another way that this contingency could be extended is when there could be repairs or credits to be negotiated.
- Appraisal: If there is going to be a loan on the property, the lender will require an appraisal on the property. Usually the buyer (and the lender) have 17 days to complete the appraisal.
- Loan approval for the buyer: Prior to entering the contract, the buyer will usually get “pre-approved” or “pre-qualified” for the loan. However, the lender will still need the actual contract and title report on that property as a minimum. So the contract allows time for the buyer and buyer’s lender to finalize the loan.
- Sale of buyer’s property: Prior to closing escrow, the buyer may have a property to sell. The buyer may need the funds to close escrow on the next property. Or the buyer may not be able to handle having 2 mortgages in place.
- Seller to find a replacement property: The seller still may be looking for their replacement home. Prior to closing escrow, the seller may want or need to secure another property.
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