In short, they are time specific clauses in a real estate contract. Their purpose is to hold the buyer or seller accountable to perform certain duties within a given timeframe. Not all contingencies will be in play, and the time periods may differ depending upon how the contract terms are written, but for a California purchase contract in general they are:
Seller has 7 days to provide to buyer documentation with known material facts about the property. This consists of several contractually required forms, but can also include seller ordered inspection reports and county or city reports. Buyers are eager to learn this information as soon as possible, and look favorably on sellers who have it readily available.
All inspections and existing reports must be completed and acknowledged by buyer by the 17th day. Many buyers will shorten this contingency time, getting their inspections immediately. This helps the seller know sooner rather than later whether the buyer will move forward with the transaction.
HOA or PUD (Planned Unit Development)
Seller has 7 days in which to disclose if the property has this designation. If it does, a package containing association documents, meeting minutes, financials, bi-laws and rules and regulations will be provided to the buyer.
PreLiminary Title Report
Usually provided by the title company, this confirms to the buyer that the seller has the legal right to transfer the property, free from liens. It will verify the property address, any easements and show the seller of record on the report.
If the buyer is obtaining a loan, they have a total of 17 days in which to confirm final loan approval. If a buyer is purchasing all cash, this would not be a required contingency. Shortening this contingency should be done only with the knowledge and commitment of the lender.
Required by the lender provide the buyer’s financing, it too has a contingency period of 17 days and is typically tied to the loan approval. In a highly competitive market, it’s not unusual to see buyers remove the appraisal contingency understanding that appraisals may not be keeping pace with pending sales and market activity. These buyers in essence, take a risk that by the time the property is appraised, newer comps will support the sales price. Or, in cases where it does not, they make up the difference in cash.
Sale of Property – this is only applicable if the buyer must close on the sale of a primary residence to fund the purchase of the home they are buying. Contingencies on a home sale first, are more common during a market that is balanced, or that favors buyers, not sellers.
In the fast-moving, multiple offer market we are in now, contingencies are often shortened, or sometimes removed all together to make offers more appealing to the sellers. All parties should have a keen understanding of how contingencies affect the transaction and be well advised to potential risks.
It’s hard not to look back on our ‘good market’ several years back, and long for those days again. But everything wasn’t all rosy.Part 1 of this two part series will illustrate what was good and not so good about the market back then.Part 2 will highlight the ‘silver lining’ in the market we’re now in.
Part 1 of this post focused on the peak of the real estate market in 2005, longingly remembering the rush those prosperous days brought. This is certainly the antithesis of that. Our expected ‘correction’ seemed endless, leaving economists scratching their heads, save for a few who predicated the bust. But the real estate world as taken on a different face, for buyers and sellers alike, with agents and industry folks in the thick of it. We’ve all faced some tough stuff. But there are some positive things going on as well.