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Contingencies: What they are, how to use them

by sfishome on October 20, 2006

WHAT IS A CONTINGENCY
When making an offer to purchase a home, you must decide whether or not to make the offer “contingent”. A contingency gives you the right to cancel the contract if you can’t satisfy the request made in the Contingency. Please note, this column in NOT intended to be legal advice, and I am not an attorney. For important contractural decisions please consult your own attorney.

The two most common examples are:

1. Loan contingency – you specify the loan you expect to get, and if you discover that you can’t get the terms you need or want, you have the right to cancel the contract. You can state the interest rate you want, and other loan terms, in your contract, and if rates shoot up, or lenders later determine you’re not credit worthy, you have the right to cancel since you can’t get the specified loan.

2. Inspection Contingency – in San Francisco this can either be a “Pest Inspection” contingency, and/or a “Property Inspection” contingency which is commonly referred to as a “Contractor’s Inspection”. In either case, you hire a professonal to inspect the house, and if you don’t “approve of the report” you have the right to cancel the contract. Some agents and Buyers mistakenly think you must provide the reason for your non-approval. You don’t – you just say “Buyer does not approve the Property Inspection report and hereby cancels the contract.”

Other contingencies may include reviewing and approving of Condo documents for Condo buildings, Sale of the Buyer’s property before Closing on the new home, the property appraising at or above the offer price, and virtually anything else you want to “inspect” or “approval” on.

WHY TO USE OR NOT USE CONTINGENCIES
Use of Contingencies make your offer “weaker” in the Seller’s eyes because you are giving yourself legal means of cancelling the contract. Often “weaker” offers are only accepted when the offer price is a lot higher than other offers – and you don’t want to over-pay do you?!?!?!

It can be a terrible experience for a Seller to believe their house is sold, only to have the contract cancelled, requiring them to go through the entire marketing period all over again. Of course NOT using ANY contingencies means you have virtually no legal grounds for getting out of the contract if you discover something very bad about the house after getting your offer accepted. So the trick is to find a middle ground, as such:

Limit the number of contingencies, and shorten the time period for which you will remove the contingency. Making your contract Contingent on BOTH a “Pest” AND a “Contractor’s” inspection, AND giving yourself 21 days in a 30 day escrow period can be VERY disconcerting to a Seller. They won’t have peace of mind for 3 weeks.

My suggestion is to choose ONLY the “Contractor’s” inspection, while setting up the appointment to inspect immediately so you only need to give yourself 3 to 7 days to approve. One contingency within 1 week feels GREAT to the Seller.

HERE’S WHY THE ABOVE WORKS SO WELL FOR YOU
While this will appear to be VERY strong to the Seller, you can do many things with this one contingency. You can cancel the contract if you find something you don’t like. Or, you can waive the contingency “subject to” almost anything you want thus re-writing the contract. The Seller can always say “no”, but since this is a “new” offer AFTER the home is already under contract, you are more likely to get this “weaker” offer accepted now vs. the initial Offer phase.

An example might be: waive property inspection contingency “subject to reduction in offer price by $50,000”. Or “subject to roof inspection, foundation inspection, mold inspection to be performed and removed in 21 days”. Ouch, that hurts the Seller, but it’s more likely to be agreed to now that you’re in contract.

Now I personally don’t recommend any of the above unless you really do find problems with the house that you were unaware of, but I do favor limiting the contingencies while essentially keeping yourself entirely protected.

Please note, I am not a lawyer, and this is not legal advice. Any contractual decision you have should be made with the advice of an attorney.

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