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Monday, April 3, 2017

What are all of these contingencies?



Understanding the Real Estate Process from A – Z – A Seller’s Guide to Real Estate – Part 8

This is the eighth post of a series in an FAQ format that I hope will help would be sellers better understand the real estate process that they are about to go through. There will be a follow-on series for real estate buyers.

FAQ – What are all of these special contingencies in the offer?

Special contingencies -  Most Purchase Agreements will already have a number of contingencies specified within their standard terms and conditions. Those might include a home inspection, a
successful mortgage application, an opportunity to see if flood insurance is required, a requirement that   proof of a marketable title be furnished, a final walk through before closing and even a target or required closing date. Those are things upon which the success of the sale is contingent; things that the buyers (and sellers) must agree upon as having been done and the results to be acceptable to the Buyer before the sale can be consummated. In addition to those, the PA may contain, either within itself or in Addendums to the PA, other special contingencies. Some common ones are:
·         
      Contingent upon sale or closing of the buyers’ home. In this case the buyers are saying that they still have to sell their house (it may not even be listed yet) or that they have sold it and this offer is contingent upon that sale taking place or on the existing sale closing. These contingencies usually have a time limit and may have a provision that allows the seller to continue to market the house and to accept other offers, subject to giving the current buyer the opportunity to remove the contingency and proceed to closing.  Listen closely to the advice of your Realtor on any contingent offer. Consider carefully any contingency that requires that you remove your home from the market for some extended period of time.

·         Well and Septic Inspections. These are usually added on Addendum and make the sale contingent upon the satisfactory results of those two inspections. Those inspections cost extra and many contingency clauses try to make the Sellers responsible for paying those costs. The septic inspection also requires that the lid to the septic tank be exposed, which usually means digging up the yard over that lid. Make sure that it is specified that the Buyer will return the yard to its pre-inspection state (or as close as possible to that state) so that you don’t end up with a big hole in the yard.

·         Pool inspection. If a house with a pool (of any type) is sold in the winter the pool is normally closed
and this contingency addendum allows the buyer to wait until warmer weather, when the pool can be opened to perform the inspection of it. This does not normally hold up the sale, but it may provide for some amount from the sale to be escrowed in case the pool and its equipment need repairs when inspected.

·         Radon testing. Radon is a naturally occurring radioactive gas that is quite common in this area of Michigan and is a major cause of lung cancer. A radon test takes a couple of days and involves putting a testing device in the basement of the home to measure for radon levels. Levels above 4 picocuries per liter require remediation. The good news is that radon remediation systems work and once the home has one it will be safe as long as that system is working.

·         Review of the Association Master Deed and By-Laws – If this is a condo listing (or in Michigan a Site-Condo listing) or a listing in a subdivision with a mandatory Home Owners Association (HOA), there will probably be a contingency that gives the buyer the opportunity to review the HOA Master Deed and/or By-Laws. Those provisions, which may be in a special Addendum or in the terms of the PA, usually have a time requirement that the documents be supplied by the seller within a few days of acceptance of the deal and that the buyer review them within a few days of receipt of them. The buyers usually have the option to opt out of the deal if they find the restriction in those document to be too onerous.

·         Review by the Buyers’ attorney – Even though almost all offers are written up on “standard”
Purchase Agreement forms; and those forms contain time proven and tested terms and conditions that have been legally reviewed, some buyers will still want their own attorney to look the contract over, especially any Addendums that contain contingencies. That is their right and is even spelled out in the standard wording of the contract. The Buyers’ Attorney is expected to comment only on the terms and conditions of the contract and not to get involved at all with the agreed upon sale price. Many attorneys feel like they have to earn their fee by finding something in the contract to object to on behalf of their client. They may mark out a term or condition of add something to the wording that is there. If they do that the whole deal may be held up while the revised contract is submitted for legal review by the real estate companies’ legal counsel.

·         An FHA or VA Addendum – Both of those Addendums, which are associated with mortgages of the same names contain terms and conditions that must be met in order for the property to qualify for a mortgage backed by those institutions. If the house fails to meet those terms and conditions the Buyer may back out of the deal.

·         Other specified contingencies. The PA may contain other addendums with terms and contingencies, so read everything carefully. Remember that the terms of most contingencies specify that the buyer must be happy with things once the contingency is met. Only the Contingent upon Sale or Closing usually specify that the Seller must be happy.

Contingencies all carry risks with them that the Buyer will not be happy with the results or outcome of the contingency. Since contingencies normally are handled after the offer is accepted and the house marked Pending in the MLS, that means that if the Buyers decide to exercise their option to walk away from the deal your house will have been off the market for some length of time.

Lest the Sellers think that the deck is stacked against them with all of these possible contingencies, or that they are being forced down their throat, it is important to note that these contingencies have all been developed over time to protect the consumer (the Buyer); however the Seller always has the right to refuse to accept any contingency. The Sellers have no reason to fear them, if they have been honest with their agent and listed any and all know issues that the house may have. In some cases, these contingencies may cover things that the Sellers have been willing to live with that new owners would find onerous or unacceptable.


Sellers should go over each contingency with their Realtor® to make sure exactly what the contingency is about, what burden it puts on them (i.e. who pays for any of the required services to accomplish the contingency) and what the consequences of the contingency not being successfully met may be. Almost every contingency provides an “out” for Buyers, a way for then to declare that the contract is null and void. Sellers should insist that all contingencies be accomplished and the results accepted as quickly as possible. You don’t want to hold your home off the market for 20-30 days waiting for the results of a contingency. 

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