In the buying process, when a seller accepts your offer, a real estate purchase contract will be drawn up to be signed by you and the seller. It contains several components, with a part dedicated to contract contingencies.
These are the conditions that must be met in order for the sale to push through. These contingencies also allow you or the seller to cancel the transaction in case the obligations are not fulfilled. So, what are the most common contract contingencies you’ll encounter as a home buyer? Here are five.
- Loan contingency
If you are relying on a mortgage loan to finance your purchase, adding a loan contingency makes sense. It gives you time to obtain your loan and to fulfill any requirements needed by the lender to approve the loan (such as the appraisal). You and your seller will have to agree on who does what to satisfy the lender’s property conditions.Once the loan has been obtained, this contingency can be removed from the contract. You can read more about loan contingencies here.
- Home inspection
As a buyer, you should never skip the home inspection. This will help you ensure you’re buying a property that’s safe to live in and in proper working order.If issues were found after a complete property inspection, you can prepare a Request for Repair to give your seller, along with a copy of the inspection report.
- Seller statutory disclosures
Your home inspection contingency should include a Transfer Disclosure Statement (TDS), as well as a property disclosure from your seller. It details any known material facts and defects about the home. This is a mandatory disclosure obligation among sellers in California.If the seller fails to provide the necessary disclosure agreements, you can choose to terminate the purchase.
- Contingent on selling existing home
If you are a buyer who wants to purchase a new property before selling your existing home, consider adding a contingent contract to purchase.Should the seller agree to this, you’ll be given some time to finish the sale of your home before buying a new property. Failure to do so can lead to your seller cancelling the purchase.
To help protect both parties, the California Association of Realtors now has the Form COP (Contingency for Sale of Buyer’s Property). In California, under this contingency, sellers are still allowed to market their home for sale while you try and sell your own property. Your seller might request to have the Right of First Refusal added, which allows them to cancel the transaction in case another offer comes along. Another version allows the seller to accept back-up offers while they wait for you to perform your end of the deal.
- Preliminary title report
You can order a title investigation in the purchase agreement to ensure the title is clean. This will also help uncover easements, restrictions, and other information that can give you sufficient reason to cancel the purchase.
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