Purchase Agreement Contingencies - Part 1

This is the first of a two-part posting dealing with the contingencies that might show up in the purchase agreement for a real estate sale

In almost every offer that a buyer makes there are contingencies specified. These may be buried in the standard contract wording (most Mortgage and Inspection Contingencies are there these days) or they may be spelled out in one or more separate documents that are attached to the Purchase Agreement (PA). These are clauses that usually specify that the whole offer is contingent upon whatever this clause is about being satisfied prior to closing. If the contingency is not satisfied and later removed, the clause usually specifies that the buyer may walk away from the deal and get his/her earnest money deposit (EMD) back.

Here are the common ones that are likely to be a part of every deal and most likely are in the Purchase Agreement document itself.

Mortgage Contingency.
Even though a buyer may hold a loan pre-approval letter, further investigations concerning the property or the borrower could result in a loan denial. Usually the buyer is required to apply for the actual mortgage within some number of days (7 to 10 is typical) and provide proof that he/she has done so (another letter from the mortgage company will normally do). Usually the contingency also specifies that the buyer has 30-45 days to get the mortgage approved. If the buyer hasn’t procured a mortgage commitment by then the Seller may either extend the contingency deadline or declare the deal dead and walk away. This is almost always in the main body of the PA.

Flood Insurance.
This contingency is usually waived, if the home is not in an area designated as a flood plain. However, it is usually in the PA and gives the buyer the right to seek a Floodplain Certification (an official document that will specify whether or not the house is in a flood plain) within a specified amount of time (usually 10-14 days). If the home is designated to be in a Flood Plain the buyer must notify the seller and may declare the deal to be null and void and get his/her EMD back.

Home Inspection.
Buyers have the right to hire a home inspector and conduct a complete inspection of the home. This is normally a paragraph in most Purchase Agreements these days and usually specifies that the inspection must be accomplished fairly quickly (usually 7-10 days) after everybody signs the PA. This clause also normally specifies a requirement for the Buyer to notify the Seller in writing (a document usually called the Results of Inspection) within days (normally 3 days in this area) of any dissatisfaction with the inspection results. The clause may specify that the Seller must respond to the Buyers Inspection Results within days (3 is normal again) and either specify what he/she will do to take care of the buyers dissatisfaction – either by offering to fix whatever the inspector found to be wrong or by offering the Buyer some monetary concession of he’ll take the house “as is.” The Buyer may accept the Sellers answer or may decide to just walk away from the deal and get back his/her EMD.

Lead-based Paint.
Federal laws gives all buyers 10 days to inspect for lead-based paint. Many homes built before 1978 contain lead-based paint. This contingency also normally offers the Buyer the opportunity to have the property tested (at the buyers expense) for the presence of dangerous lead levels, within that 10-day period. It provides for notification to the Seller of the test results, if lead is found and gives the Seller time to respond with a remediation plan. If the buyer doesn’t like the sellers' response, he/she may walk away and get back their EMD.

Title Insurance.
The Seller is usually required to provide a copy of the Owner's Title Insurance policy, which will contain information about any easements and/or "blemishes" on the title that may affect the ability of the owner to pass a clean title. Most local PA’s specify that this preliminary title search must be done and he results given to the Buyer within 10-14 days of the agreement date If the buyer sees easements that are onerous to him or liens that might hold up closing, he/she can ask the Seller to clear those up before proceeding or could even declare the deal to be dead.

Municipal Inspections.
Some local government jurisdictions (Detroit, Taylor and Dearborn are examples in our area)require "city inspections" of houses that are being sold. Those inspections are done to make sure that the house is up to current building codes, prior to being sold. The Seller will be required to make any repairs or updates and to get a city issued Certificate of Occupancy prior to closing on the house. Most of these municipalities require the buyer to come in to city hall to pick up the certificate. If the Seller can't or doesn't do the repairs, some cities will allow the posting of a bond by either party to insure that the repairs are made later.

Seller Statutory Disclosures.
Sellers are required in Michigan to disclose all known material facts, including preparing and delivering a SELLER’S Disclosure document. This isn’t really a contingency document like the rest of these, but it is a document that the Buyer should review and if there have been any false statements made by the Seller this document would be grounds for canceling the deal or for later law suits. The buyer may cancel the deal and get his/her EMD back right up to the date of closing, if the Seller has not supplied a valid Seller's Disclosure. It should be noted that this document may be missing or say nothing, if the property is a foreclosure. The banks who own those houses often have their own, very lengthy documents that essentially say that they never lived in the house and know nothing about its condition - I call it the Sgt. Schultz Addendum.

Tomorrow we'll look at the contingencies that are more likely to be in documents that are attached to the standard PA as part of a deal. Those can vary greatly by region of the country, so we'll be looking only at those in use locally in Michigan.