What is a "Contingency" in an Offer to Purchase Real Estate?

First of all, before I write a whole bunch of stuff about contract contingencies, let’s make it perfectly clear that I’m not an attorney. A lot of what I’m saying here has to do with the standard boilerplate California Association of Realtors Residential Purchase Agreement (the “RPA” by C.A.R.), and is a) open to legal interpretation, and b) negotiable, so your contract might be different than the standard I’m referring to.

The dictionary says contingency is the "dependence on chance or the fulfillment of a condition". The RPA purchase contract includes many contingencies that protect a buyer and add risk for a seller, and a few that protect the seller, too. A contingency is something that the contract depends on, conditions that give a buyer/seller an “out”.

Among other buyer contingencies, the RPA includes the following "major" ones:

• a loan contingency,
• an appraisal contingency,
• contingencies of the buyer’s acceptance of HOA reports and the sellers’ disclosures,
• an inspection contingency that includes investigation of the property’s insurability,
• and there is a checkbox that introduces a contingency on the sale of some property the buyer plans to sell.

In the standard language of the contract, each of these contingencies has a deadline by which it must be removed. But everything is negotiable, and if you have specific concerns, you should talk to your representative about the possibility of writing in longer periods or even asking the seller to allow the contingency to remain for the duration of the contract.

For the seller, pretty much the only contingency is that the buyer has to remove his/her contingencies in writing by each deadline or, after a warning and a period allowed for correction, the seller can cancel and move on to another buyer.

The “most major” contingency in the standard C.A.R. offer form, short of a sale-of-buyer’s-property contingency, is the Buyer’s Inspection Contingency. Even though the standard language of the RPA clearly states that the property is sold in its present physical condition (“as is”, and it has always puzzled me why so many banks require the buyer to sign a separate addendum further confirming the purchase is “as is”), there is a Buyer’s Inspection Contingency which grants a buyer a certain number of days to bring the professional inspectors of her choice to the property to investigate the details of the property’s condition.

If the buyer learns of an issue that she isn’t willing to live with, she can, indeed, make a repair request to the seller. The seller can agree to all, part, or none of the requests; in fact, the seller doesn’t have to even respond to the request(s). But if the buyer is unsatisfied, she can cancel the contract as long as she does so within the time limit for the contingency.

If a seller says no to a repair request, the buyer has only two choices: live with it or exploit the contingency and cancel the purchase. Although a buyer has an inspection contingency, she can’t force a seller to fix something unless he has already agreed to do so in the contract. An example of this might be when the seller has agreed in the RPA to provide a clear termite report, but then the pest control company requires expensive work be completed before it will issue a clear report. The seller is under contractual obligation to get the work done because he has promised to provide the clear report already in the contract that has been signed.

The seller’s contingency is pretty much never triggered as long as the buyer completes his responsibilities on time. So even though another buyer might come along and offer more money or better terms than Buyer1, as long as Buyer1 obeys all the contract deadlines (and doesn’t cancel per one of his own buyer’s contingencies), the seller has no option but to sell to Buyer1.

So Sellers, and Buyers! Make sure your representative is carefully walking you through your contract paperwork before you sign so you know exactly what your responsibilities and your rights are. And if there is something you have particular concern about, make sure you communicate with your agent team so they can be sure to do everything possible to propose contingencies in your contract that cover those circumstances.

All Cash vs. Financed: Why Does a Seller Care?

When writing offers for our buyers, we at the Etheridge Team are often asked why the buyer has to spell out how much of the offered price she intends to put as a down payment and how much she intends to finance. If we are offering $500,000 to a seller, why does he care whether that half a mil is coming from my pocket or from a bank? Why is a $490,000 all-cash offer possibly “better” than a $500,000 cash-plus-financing offer?

Today, more than ever, risk is something all parties to a transaction put a dollar amount on.

When a buyer makes an offer, his offer is for a price, yes. But along with the price come many other terms that the seller may assign a dollar value to. The standard boilerplate California Association of Realtors Residential Purchase Agreement (the “RPA”) includes many contingencies that protect a buyer and add risk for a seller, and a few that protect the seller, too. A contingency is something that the contract depends on, conditions that give a buyer/seller an “out”. Click here to read a post about the contingencies in the standard C.A.R. RPA offer form.

If the buyer wants a very long escrow, the seller may be excited about the opportunity to take her time moving out or selecting her new home (point to the buyer), or she may be worried about all the additional risk she is going to have to deal with since the number of days for something to go wrong is increased dramatically (point against the buyer). If a buyer’s offer is contingent on the sale of their current residence, and that property isn’t yet even on the market, that is a very high degree of risk, and if the seller is going to consider that at all, the buyer is likely going to have to offer something more to make it worth the seller’s while. If the purchase is contingent on the sale of a buyer’s property that is going to close escrow tomorrow… well… that is a different story. Clearly the risk is dramatically less in the latter case.

One of the “biggest” contingencies in the RPA is the loan contingency. In the lending climate right now, the rules are changing on a daily if not hourly basis. Yesterday a bank may have been fine making a loan on a property with a broken furnace, or in a neighborhood where 38% of the residents are tenants, or to a buyer whose credit score is 649, but perhaps today that same bank won’t lend in any of those circumstances. A buyer’s qualifications can change from day 1 of an escrow to the day the bank should fund the loan; she could lose her job or she could incur more debt like buying a new car which could possibly render her ineligible for the home loan. Even if you present to a seller all the supporting documents with your offer like a preapproval letter and bank statements proving you have your down payment in the bank, a smart seller knows that’s no guarantee the lender is going to be there when it’s time for them to cough up the dough.

If you need a loan, there is more risk with you than there is with an all-cash buyer, and the more loan you need, the greater the risk. If your offer says you plan to put 30% down but then you decide during the escrow to only put 20%, then you have to get the seller’s permission to modify your terms to accept the additional risk.

Bottom line: the details of your financing plans are material to the seller’s decision of which offer to take. This is why the seller (and the contract) require that you provide supporting documents like a preapproval letter and a copy of a bank statement proving you have the cash for your down payment. A good agent is going to make sure the package you present with your offer makes you and your offer look as strong and reliable as possible, because that just may make the difference that puts your offer on top!