Tuesday, December 21, 2010

How to Use Contingencies In a Real Estate Transaction.

Everyone is familiar with the conversation where the other person says, "Yes, but.." This person is agreeing with you but only if certain conditions are met. A purchase agreement is similar in that you are agreeing to buy a property subject to certain things being met. The conditions you set are called contingencies.

It is uncommon to have a purchase agreement without contingencies. In fact, contingencies are an essential part of many offers. In general, contingencies are added to protect you (the buyer) but may also serve to protect the seller. All of the contingencies of a purchase agreement must be met before the sale can be competed.

What are some Examples?

Contingencies can be virtually any conditions you wish to set. They can be anything such as having your Uncle approve the central furnace or your Aunt is satisfied with the kitchen sink. The sale is "contingent" upon all of the conditions being met. Contingencies are also called "subject to's" since the sale is "subject to" something happening.

An important contingency is a financing contingency. It states that the purchase is subject to the buyers being able to obtain a loan for the required amount. If you can not get the loan you need, the sale is canceled and you deposit is refunded. It is very important to have this contingency since you will loose you deposit if you are unable to get a big enough loan. Making an offer without a loan contingency is very risky.

What are Some Common Contingencies?

There are many contingencies that will protect you (the buyer). Here are some you will definitely want in your purchase agreement:

* You will be able to inspect the property and must approve the inspection.

* The sellers must disclose problems with the property and you must approve of such disclosures.

* You will be allowed to make a final inspection of the property just before the deal closes and confirm that the is no new damage since you originally inspected it.

* You will get your deposit back if the sellers back out.

* You can back out if you are unable to get financing.

Make sure that you clearly state your needs to the agent or attorney preparing your agreement. If there are any special conditions that must be meet (such as being able to cash in some stocks for a down payment), make sure it is in writing a contingency. Otherwise you may be unable to complete the purchase on time and lose your deposit.

Who Writes In the Contingencies?

A contingency is a legal document and must contain the proper language to be legally binding. For this reason contingencies are ideally crafted by attorneys. However, since this is a normal part of business, many Realtors are extremely versed in writing contingencies. In fact, agents may be far more experienced in this area than an attorney. In practice, your Realtor will be more than capable of writing the contingencies you need.

Whom Does the Contingencies Protect?

The contingencies noted so far are intended to protect you (the buyer). They allow you to back out of the deal without consequences if something does not work out or you can't get financing, you discover problems with the house or you lose your job, etc..

As noted, contingencies may also be added to protect the sellers. Such examples are the sellers may insist that the transaction be completed within 30 days. If you are unable to get you cash together or get your financing, you could lose the house and your deposit!

Some sellers may want you to purchase the house "as is." That is, no matter what's wrong with it, the sellers won't be responsible for it. You may for example find that after making an offer, the septic system badly needs $15,000 worth of repair. If you agreed to by the property "as is" then you will be stuck paying the difference.

You Can Use A Contingency to Get Yourself a Better Deal

The skillful negotiator will use contingencies to improve the deal. And there is really no limit to the type of contingency you can craft. Deal points can be over anything ranging from the date escrow closes to the specific closing costs the buyer and sellers must pay.

A great way to start negotiating is to find the sellers weak point and apply the pressure there. For example, the sellers may absolutely need to close the deal within 25 days so that they can purchase a new home. You agree as long as they meet your contingencies. Remember, that although contingencies are great points for negotiations, they are there to protect you. They offer you an easy way to back out if something goes wrong.

Avoid Unnecessary Contingencies

Sometimes when buyers discover the great protective value of contingencies, they insist that extra ones be placed in the purchase offer. For example, you insist that the purchase become contingent on you not losing your job before the deal closes. (You pretty much get this protection in any event, since if you lose your job, the lender probably won't give you a mortgage, and you can back out using the financing contingency.)

Or you insist that the deal be contingent on your not getting ill during the escrow period, or your spouse not falling out of love with the home, or your getting approval of the purchase from you parents. Remember, you can make the deal contingent on anything!

The problem is that each time you add a contingency, you weaken the deal. The sellers ask themselves, "Why does the buyer insist on this?" If the quickest answer is that the buyer is wishy-washy and may not go through with the deal, the sellers may simply refuse to sign. You may squash a perfectly marketable deal simply by insisting on unnecessary contingencies.

As many real estate agents have witnessed, lawyers can ruin an otherwise marketable deal by adding contingencies favoring their clients to the point where the other party simply won't go along. While legal advice is great, sometimes common sense and human nature play a stronger role.

All The Best,


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