Michael Edlen: The ABC’s of Contingency Clauses

By Michael Edlen
Special to the Palisades News

“I want to do a non-contingent sale,” is a statement we hear from time to time. A statement like that generally refers to a contingency on the sale of the buyer’s current home.

While some buyers may request such a contingency, it is very uncommon in a strong seller’s market, and few sellers would be willing to accept it. But, it may be helpful to look at different types of contingency clauses. There are several approaches that a seller could consider, and both buyers and sellers may want to discuss them with their agent.

The most common contingencies in home purchase contracts involve property investigations, financing and appraisals.

Many sellers tell their agent they expect to sell the property “as-is.” The fact is that the standard purchase contract in California now specifies that the buyer is buying a property in its present “as-is” condition, but that the buyer has a right for an agreed period of time to find out that condition.

Michael Edlen

Typically, the inspection contingency period is between seven and 17 days, and buyers might choose to have various specialists check things out, in addition to a general building inspection.

This may include inspections for termites or dry rot, sewer line or chimney scoping (with a camera), or a closer look at possible environmental issues, such as mold. Other inspections often performed include checking the condition of the roof, drainage and geology of a property (especially on a hillside).

If a buyer finds various conditions that are not fully acceptable, they may request the seller to either resolve the situation or to provide a credit in the escrow to offset the cost of work requested. The seller may elect to accept the request, reject it, or propose a compromise. It will then be up to the buyer to accept the seller’s response or not, or to suggest an alternative compromise.

Another key contingency is one surrounding the loan. Most contracts provide a period of 17-30 days for the buyer to obtain loan approval, and an appraisal sufficient for the lender to underwrite and fund the loan. Due to a rapidly appreciating market and increased government regulations, the process of obtaining a loan has become more difficult. It is not unusual for buyers to request a time extension to remove their financial contingency, and sometimes a second appraisal is required, which may delay the process another day or so.

If the purchase is in a homeowner’s as- sociation, the buyer has several days to review the association bylaws, budget and minutes from meetings. Special assess- ments and increased monthly payments may become issues.

The contingency periods protect the buyer from having their deposit at risk— until they have removed all contingencies. If they do not remove them by the dates agreed upon, and if an extension of time is not mutually accepted, the seller may issue a “Notice to Perform.”

This notice typically will give the buyer two days to either remove contingencies or risk that the seller will cancel the escrow.

Both buyers and sellers should discuss these and many related issues with their agent before entering into a purchase agreement. Misunderstandings or false expectations can be avoided by doing so, and smoother transactions are much more likely to close as desired by all parties.

Michael Edlen is ranked among the top 100 agents in the country and is available for consultation. Call: (310) 230-7373 or email: michael@michaeledlen.com.

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