Any condition that must be met before you purchase a property or before the seller sells it is called a ”contingency.”
All such contingencies must be specified in writing, preferably in both the offer to purchase (if there is one) and the purchase and sale agreement. Think of contingencies as the equivalent of fire escapes. They represent avenues of exit from the agreement if one of the conditions you`ve identified as essential is not fulfilled.
Any number of contingencies may be inserted, but there are two basic protections that you as the buyer will always want to have: a financing contingency, which addresses your ability to obtain a mortgage; and an inspection contingency, which covers a structural home inspection.
The financing continency
The financing or mortgage contingency clause makes your obligation to buy the property contingent on your ability to obtain financing under specified terms and conditions. Often the ”standard” contingency language talks only about the buyer`s ability to obtain a mortgage. But it`s in your interest as the buyer to specify the maximum interest rate and the type of mortgage that you`re willing to accept.
Prudent buyers tell their lawyers to make sure the documents contain a much more specific contingency clause, something that reads, for example, like this:
This purchase is contingent on the buyer`s ability to obtain a 30-year fixed-rate mortgage at no more than 13 percent plus two points or a one-year adjustable-rate mortgage at no more than 10 percent with two points and with interest rate caps of no more than 2 percent per adjustment and 6 percent over the life of the loan.
You may choose different figures, and your lawyer can guide you through that. The general idea is to establish some reasonable financial limits on your obligation to go through with the transaction.
The financing contingency clause should also specify how much time you have in which to obtain an unconditional written commitment for a mortgage. Some loan approvals are contingent on everything in the world; make sure your mortgage contingency clause makes it clear that a conditional commitment is not enough to bind you. If you don`t get an uncluttered mortgage approval on terms acceptable to you within the specified period, you will then have the option of either canceling the transaction, requesting an extension from the seller or proceeding with the deal without being assured of the financing.
It`s important that the financing contingency clause leave a reasonable amount of time for the buyer to obtain a lender`s commitment. Allowing too little time will place you in the position of having to seek an extension from the seller, who usually isn`t required to give you one.
How much time you should allow depends on market conditions and industry standards, which can vary from one area to another. There have been periods when it was taking lenders as long as 120 days to process loan applications. In down markets, some lenders say they can turn around a loan request in a matter of days. As a rule, 30 days should be sufficient in most areas under most normal conditions.
The purchase and sale agreement shouldn`t be one-sided. The seller`s interests should be protected too, and most sellers, reasonably, will insist that the buyer make a ”good-faith effort” to obtain financing. That usually means more than spending a month trying to persuade your father to lend you the money. The seller wants to avoid a situation in which the buyer, for whatever reason, simply changes his mind after signing the purchase and sale agreement and either fails to apply for a loan or makes no serious attempt to obtain one.
The inspection contingency
This is another must in any purchase and sale agreement. It provides for a structural inspection of the property and often a pest inspection as well, at the buyer`s expense, and makes the sale contingent on the results. If the inspection reveals that termites have more equity in the house than its owners do, or that a central support beam has rotted beyond repair or the foundation is crumbling, you want to be able either to walk away from the deal or to reopen the discussion about what the purchase price will be.
So watch out for wording that allows you to cancel a transaction only if
”serious” structural flaws are discovered. ”Serious” is in the mind
(and pocketbook) of the beholder. Avoid provisions, too, that give the seller the option of paying for any repairs required. You may well want to negotiate such an agreement later, but for now you may also want the option of backing out of the transaction.
The best and cleanest inspection contingency clause states simply that if the buyer is not satisfied with the inspection results, he or she can cancel the transaction within a specified period. That period (usually around 10 days) should be long enough to allow the parties to renegotiate the term if flaws are discovered and the buyer still wants to make a deal, but short enough that the seller is not forced to keep the house off the market for weeks waiting for an indecisive buyer to decide what he or she wants to do.
The best way to find a home inspector is not by asking the broker or seller to recommend one. The broker has an obvious (and legitimate) interest in seeing the deal go through, and there exists at least the possibility that an inspector who is referred by the broker might be subject to subtle or not- so-subtle pressure to ignore or downplay any problems that might derail the transaction. It`s much better to get a recommendation from your attorney, or from friends or acquaintances who have used an inspector in the past.
Ask your inspector what the inspection will cover, how long it will take and what it will cost. Some structural inspections will cover pests, but others specifically exclude that area.
Other contingencies
Financing and inspection contingency clauses have become almost standard insertions in most purchase and sale agreements, but they are by no means the only ones that a buyer or seller might want to specify.
It`s becoming increasingly common, for example, for buyers to insist on a radon contingency clause, making the purchase contingent on the satisfactory outcome of a test to determine radon levels in the dwelling. If radon is discovered, the buyer and seller can negotiate terms for dealing with the problem.
Your purchase of a property can be made contingent on virtually anything you consider essential to the sale. The seller, of course, has the right to reject any contingency clause you propose, and you in turn have the right not to purchase the property unless conditions that are important to you are included in the contract. If you`ve found problems you want corrected, you can specify that the seller must complete the repairs he or she has agreed to by a certain date. If the work isn`t finished on time or to your satisfaction, you have a legal out, if you want it.
