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Tuesday, February 5, 2008

Contingencies - Part 2

This is the second of two installments on the contingencies that may be a part of any real estate Purchase Agreement (PA) contract. In the first part we discussed the contingencies that are likely to be written right into the PA itself. In this installment we'll look at the clauses that are likely to be written-up on separate Addendums that are attached to the PA.

Wood Destroying Pest Inspection.
This could be thought of as an extension to the home inspection process. In many areas termites or powder post beetles are a problem and should be looked for by a qualified pest inspector. The addendum should specify who will pay for the pest inspection and whether outbuildings or garages are covered in the inspection. This clause may also require written notification to the Seller and specify a response time from him. Sometimes the home inspection will uncover evidence of a possible infestation which then may require this separate inspection to be done. The issue of who would pay for any repairs may be handled separately; however this contingency, like all others, should specify what happens if the Buyer is dissatisfied with the results and what requirements there will be for a Seller response. Also needed here and in all of the addendums below is a statement about the Buyers right to declare the contract to be void, should agreement on resolving any issues not be reached.

Roof Inspection.
Some home inspectors will not walk on a roof due to possibility of damage and / or liability if the roof is damaged. Most home inspectors can tell, even from the ground, if there are issues that warrant further inspection. Some buyers hire a roofing company to conduct a roof inspection. A good home inspector should be able to cover this issue. At issue here may be more than just the age of the roof, since there have been roofing materials recalls that could impact even a newer roof.

Septic or Sewer Inspection.
Sewers can get clogged from tree roots or deteriorate over time. Plumbing companies can insert a camera into the sewer line to check for damage during a sewer inspection. Septic fields too may become saturated or the field tiles become clogged. Septic inspections usually require that the tank be pumped and that core samples be taken at various points in the field to test its condition. In our area, the Seller normally pays for this test and the water test (see below), but not always. In houses with septic fields, this is potentially the most expensive issue that an inspection can uncover; since replacing a septic field, especially an “engineered field,” can run much more than $10,000.

Private Well Inspections.
If the home is not connected to city water -- on a private well, buyers may want assurance that the water is potable and meets acceptable health standards. This is a test that involves taking a sample at the house and sending it out for analysis, usually to a county health office. It can take several days to get results. A high arsenic level in the water is a common issue, as is high bacteria counts. The bacteria issue is relatively easy to treat; but, the arsenic issue or other toxins in the water may be a show-stopper.

Radon, Mold or Asbestos Inspections.
Depending upon the area the home is located in or as a result of the visual inspection, home inspectors sometimes will recommend additional inspections by licensed entities to check for special situations such as radon gas, mold or asbestos. A good home inspector will be able to do these tests and have the necessary equipment to do them, but at an added cost. The mold test requires that samples be taken in the house and be sent out to a lab for testing, to identify the mold type. Most molds are not the dreaded “black mold” that yo may read about, but even the more common types may need remediation by professionals. Radon is a naturally occurring radioactive gas in the soil that can bubble up and enter the house through the basement. Radon in the number 2 or 3 cause of lung cancer in the United States and is fairly common in areas of the country that were once covered by glaciers (like Michigan). If the basement is to be used for anything other than just storage, getting a Radon test is advised. The radon test requires that an instrument be left in place in the lowest level of the house for 48 hours to record radon levels hour by hour. Asbestos was once used extensively within homes to insulate pipes and even as a siding material. Now considered to be a dangerous carcinogen, it is a good idea to at least know where any asbestos is in your home. The inspector will be able to see most asbestos issues. If the asbestos is “sealed” by being wrapped with tape and painted over (as most pipe insulation installations were) you may choose to just leave it alone. The same is true with asbestos siding; however, any and all of these issues are grounds for the Buyer to ask for professional remediation or to back out of the deal. More sales are canceled because of mold issues or radon issues than most other causes. Asbestos is still out there but is less of an issue and not an issue at all in newer-build homes.

Early Occupancy Agreements.
Contracts can be contingent upon the buyer and seller entering into a written agreement that allows the buyer to rent the property prior to close of escrow. This is known as early buyer possession. This is fairly rare in our area and most lawyers would advise Sellers not to accept this contingency. This contingency may just end up being a completely separate contract.

Homeowner Association Documents & Private Road Agreements.
Buyers should obtain for approval a copy of all homeowner association documents, including meeting minutes, if applicable. There is usually a timeframe specified for the review of the Master Deed and HOA By-Laws, after which the Buyer has to object or agree to proceed (which he/she will by default if they don’t bring up issues during the timeframe). Most of these HOA review contingencies also include a provision for taking a look at the HOA budget and financial statements to make sure that the HOA is solvent and capable of meeting it’s obligations without resorting to “special assessments.” Homes that are on private roads (which includes almost all “site condo” developments) should also make available a copy of a written Private Road Agreement (unless that is covered already in the Association By-Laws), which is signed by all of the homeowners on the road and specifies how the road will be maintained and how the cost will be split. Many mortgage companies now require a copy of the Private Road Agreement before granting a mortgage. Unfortunately, many private roads were created and developed without these agreements. Just saying, “Old Bob at the end of the road just takes care of it” won’t meet the requirements of most mortgage companies and it can become a major, last-minute hassle to try to get everyone on a private road to sign up in the midst of a sale.

Contingent upon Selling Existing Home or Contingent upon Closing the Sale.
Buyers who have an existing home might want to buy before selling and make the contract contingent on selling their home. Sellers who accept contingent offers like this often give the buyer a certain number of days to perform. If the buyer cannot perform, the seller retains the option to cancel the contract. These contingencies essentially give the Buyer the “first right of refusal” on any other sales offers that come in, usually granting the original buyer 48 or 72 hours to remove the contingency or lose the house. A variation on this theme is where the Buyer's home has been sold but has not yet closed. The Buyer may make the Purchase Agreement for his new house contingent upon that sale actually getting through closing. Sellers in the today’s market aren’t likely to accept a Contingent upon Sale addendum, because they know that it might take the buyer over a year to sell his house; however, the Contingent upon Close Addendum is fairly common.

Contingent upon Whatever.There are likely many more potential contingencies that I’ve missed here. The point is that the two parties can agree upon making almost anything a contingency. They just have to state clearly what the contingency is and what the consequences are if that contingency is not met prior to the closing. Other things might include that the sale is contingent upon a land split being finalized or a re-zoning of the property being approved or any number of local legal issues or home condition issues being resolved. The contingency clause is like the "If-Then-Else" statement in computer programming and needs to be just as unambiguous. IF the Seller does this, THEN the buyer will proceed to closing, ELSE something other than a closing happens.

Documenting issues.
Most of the contingencies that we’ve discussed will have some provisions for notifying the Seller, should issues be uncovered that need to be resolved. Usually there will be a timeframe specified (3 days seems normal) to provide that written notification to the Seller and a timeframe specified for a response from the Seller (again 3 days seems normal). Those documents do not necessarily become a part of the contract; however, once some agreement is reached between the Buyer and Seller, that agreement should be documented in an Amendment to the PA; which specifies what the Seller has agreement to do – make the repair or offer some amount of money off the purchase price as a concession to the Buyer. If a repair is to be made, there is normally some re-inspection clause in that agreement, which becomes a new contingency (the Buyer must now be satisfied with the repair or may still walk away).

Removing contingencies.
In general, it is a good idea to have another document, sometimes labeled as an Amendment, to remove each contingency as they are satisfied. Most contingencies have some deadline stated right in their wording; however, just letting that deadline pass may not automatically remove the contingency. It is best to create a document that says that the contingency has been resolved to the satisfaction of both parties and have both the Buyers and Sellers sign it. It is important to have a “paper trail” for every aspect of the contract and removal of the contingencies just wraps things up nicely.

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