Making the Offer-Contingencies

Offer, Acceptance, Contingencies

The Offer

Once an offer (in California typically utilizing the residential purchase agreement) is made by buyers, either the seller rejects, accepts or counters the offer.

Counters

Once countered there may be numerous sessions of counters of a buyers offer, with the seller's countering, buyers countering back, etc. (simply put these are all separate offers to purchase or sell). This can go on for as many times as the parties wish to allow, although most deals have only a few such backs and forth volleys.

Finally, it has happened and the seller has accepted the offer now what?

Contingencies

A contingency is a part of a real estate purchase agreement that essentially provides the buyer with a contingency or timeframe to meet a specific condition that allows the buyer to cancel the contract without forfeiting their earnest money deposit. This money deposit which is held in escrow is typically a percentage of the accepted offer price. 

In California, a buyer will submit an offer to purchase real property contingent buyer’s inspection of the property during the escrow period, the property appraising at the offer price, and the buyer obtaining a loan at a stated market rate. Additionally, the buyer must approve the seller’s various disclosures and a title search is performed. There are other contingencies available – like a contingency that the buyer must first sell their home – but these are the most typical.

Contingencies are included in the offer to purchase contract to protect the buyer, who will typically be entitled to a refund of the entire earnest money deposit before their removal of the contingencies. As part of the accepted offer, most buyers will include the three basic contingencies. If these follow the standard agreement periods they have 17 days for inspections, 17 days for appraisal, and 21 days for a conventional loan. These timelines start at the acceptance.

In essence, the contingencies are a deadline to perform but if the seller allows it the contingency period is elastic and can be overstepped by the buyer. If following the contingency expiration periods the buyer has not delivered to the seller a removal of the applicable contingency or cancellation of the agreement, then the seller after first delivering to the buyer a notice to perform (C.A.R. Form NBP) the seller may cancel the agreement. 

In certain instances, the buyer may also make a written request for an extension of a contingency period to allow for a lender to perform or for other reasons. In this case, the seller may allow or deny the requested extension. 

Inspection Contingency - 17 days typical (but may be shortened)

Unless the buyer intends to demolish the home or has no worries about any of the issues inspections may uncover the buyer should be very wary of not including an inspection contingency in the purchase agreement.

The inspection can incorporate the general inspection as well as any other inspection you wish performed. Structural, plumbing, foundation, electrical are just some of the physical inspections that may be done. Document inspections may include, permit searches, verification of square footage, zoning, easements or verification that an addition or ADU (accessory dwelling unit) conversion is possible.

Following all desired inspections, the buyer may submit a Request for Repairs, which will either ask the seller to repair the issues, give a monetary credit or revise the purchase price based on the findings of the inspections. 

Appraisal Contingency - 17 days typical (but may be shortened)

If the buyer is certain that they would not have a problem covering a shortfall should it exist they may elect to remove the appraisal contingency from the purchase agreement to make their offer more attractive to the seller. Please review this decision carefully and fully with your financial advisor and real estate agent.

An appraisal is performed by the lender to make certain that the home is worth the amount of the loan (mortgage amount) they will be lending on the property. It gives the buyer the right to cancel escrow without penalty if the independent appraiser determines the price of the home to be worth less than the purchase price and while this is rare it does happen.

If the appraisal comes below the amount required the buyer may walk away, renegotiate with the seller, or elect to add more of their own money to cover the shortfall between the loan amount and the purchase price. 

Financing Contingency - 21 days typical (but may be shortened)

The contingency period allows the buyer the required time to secure financing for the property in the purchase contract, the buyer's agent may specify a specific interest rate or type of loans such as an FHA or VA loan.  

Some lenders may be able to swiftly process a loan typically direct lenders and mortgage brokers may be more responsive than banks for instance but discuss the time requirements with your chosen lender in advance and make certain that your agent is aware of the parameters they will require. 

In certain cases, a buyer may choose to forego a financing contingency; if they have intentions to purchase the property for all cash for example. These all-cash offers are generally very favored by sellers so that is the inducement for the buyer to do so.

Even then once accepted a buyer may pursue a loan but it is not a reason to withdraw if a loan can not be secured.

In these cases, if the buyer defaults they would be liable for loss of their deposit and perhaps other damages if pursued by the seller so take not including this contingency in the purchase agreement very seriously.

Always consult your agent, broker and tax or financial advisors to decide on your best options when negotiating contracts. Contact us anytime for assistance!