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Common Contingencies

by | Jan 30, 2020 | Buying, Selling

Contingencies Explained

72 Hour Contingency

Looking to buy a home but you need to sell your current home first?  This contingency is the answer for that.  This contingency covers what will happen if you put forward an offer on a property and if you are able to purchase it with or without the sale of your current home. 

The seller of the property you are looking to purchase will continue to market the property you are interested in buying to attempt to procure more offers on the home.  This is due to the uncertainty of being able to sell your home prior to the purchase of another property.  The property will be under contract and you will still go through the typical steps of purchasing the property as if you were going to buy it.

If the seller of the subject property does procure a new offer , they may negotiate with the third party (new potential buyers of the subject property) to find an acceptable offer.  If they intend to accept the new offer, then the sellers will send you notice of intention to accept offer.  Then you (original buyer) will have 72 hours from receipt of the notice to release the contingency of the sale of your home.  If you are unable to purchase the subject property without selling your property first, then the agreement will terminate.  If you are able to purchase the home along with owning the other home, then you will continue with the purchase and have two homes until your original home sells.  You will need to provide proper documentation from your lender indicating that you are able to purchase the home without the sale of your original home.

Title Contingency

The buyer may be provided with a preliminary title report on the subject property after the start of the transaction and typically after the inspection period.  This preliminary title report is contingent upon buyer’s receipt and approval to the buyer’s satisfaction of the report.  The buyer will have 5 days from the receipt of the preliminary title commitment to raise objections.

 If the buyer does not approve the preliminary title commitment due to defects such as liens, unknown ownership, or easements; then the sellers (at their expense) will have 30 days to remove title defects and encumbrances unless they are to be cleared at the date of closing.  If the seller is unable to correct the disputed defects and encumbrances, the buyer may either accept the issues with the title and close on the property or decide to terminate the agreement and earnest money will be returned to the buyer.

Appraisal Contingency

If you aren’t purchasing the subject property with cash, then you will most likely be using this contingency.  The appraisal is a requirement for most loans to find the appraised value of a property.  The contingency is used to ensure you aren’t paying too much for a home.  Lenders will not lend on a property where the appraised value is less than the purchase price.  If the appraised value of the subject property is less than the purchase price, the parties may renegotiate the purchase price or other terms. 

It is uncommon, but it does come up every so often that the accepted purchase price is greater than the appraised value on the property.  In this case, the Seller has a defined amount that they would like to or need to sell the subject property for; and the Buyer’s lender will only loan on the appraised amount.  They need to find a middle ground or agreement, or the transaction will be terminated, and the Buyer’s earnest money will be returned. 

Example: The purchase price of the subject property is $250,000.  The appraisal comes in low at $240,000.  The Seller does not want to reduce the purchase price of $240,000 and the Buyer still wants the subject property.  At that point, the Buyer will come up with the remainder amount of $10,000 in cash to purchase the property.  The lender loans on $240,000 + Buyer’s additional $10,000 cash to satisfy the purchase agreement.

Inspection Contingency

The buyer can either decide to waive or not waive the inspection contingency when submitting a purchase agreement on a subject property.  The inspection contingency is in place to give you proper time (usually 15-21 days) to allow for further investigation of the property and identify issues that aren’t readily present when submitting an offer. 

The Buyer’s investigations of the property may include but are not limited to geotechnical, structural, foundation, roof, flooring, HVAC system, electrical, plumbing, appliances, exterior, insulation, drainage, windows, well & septic systems, paint, and radon.  Buyer and Seller have the right to be present for all inspections and buyer shall give reasonable notice with a day and time of the inspection.

All inspectors must be licensed within their respective trade for the particular inspection.

If the Buyer needs additional time beyond what is agreed upon, they may notify the seller on or before the end of the inspection period for an additional 5 business days to complete additional inspections or investigations. 

The Buyer and/or inspector may not do any intrusive inspections (such as cutting out a hole in the wall) without prior written consent from the seller.  Buyer shall repair and restore any damage cause to the property resulting from any inspection.

The Seller is to make the property readily accessible and unobstructed and have all services/utilities on at the time of the inspection.

The Buyer has a few options to choose from after completing the inspections:

  • Approve the further investigations of the property and waive the inspection contingency.
  • Disaprove the further investigations of the property, and terminate the agreement. Earnest money will be returned to the Buyer.
  • Request further inspections.
  • Propose repairs based on further investigations to the Seller.

In most transactions, Buyer’s propose repairs based on what inspections had revealed on the property.  The seller has 7 days to respond to the Buyer’s notice and agree, negotiate, or disagree to said repairs.  If the Buyer and Seller are unable to reach and agreement within 5 days of Seller’s response, the agreement shall terminate, and the earnest money shall be refunded to Buyer.

Financing Contingency

For the buyer to be more confident in making the decision to purchase a home. This contingency is highly recommended by Alpine for every transaction involving a lender.  If the buyer is readily submitting documentation and going through the proper steps in good faith and financing falls through at no fault of their own, earnest money will be refunded to buyer.  If the buyer fails to submit proper paperwork and does not act in good faith towards procuring financing, the transaction may be terminated and earnest money could be passed to the seller.

There are many forms of this contingency, but the main point is that you are looking to purchase a property and you may need to procure financing for it.  If you are unable to procure financing, you shouldn’t have to be liable in purchasing a property if financing is an issue outside of your control.

Water/Septic Test Contingency (Private Water & Septic)

Many lending programs want to know if the subject property’s private water and septic system is in good working order.  In Southeast Alaska it is very common to have a home connected to a private cistern with water catchment system (gutters to collect rain water and a water tank) and a private septic system (septic tank and drain field or outfall system).  These properties are usually found outside the public water and sewer system either north or south of the City of Ketchikan.

A water test checks for as little as 1 factor or up to 5 factors in defining if the water is safe to consume.

A septic test is to check if there are any leaks and to define if the system is up to current standards and registered with Alaska Department of Environmental Conservation (ADEC).

These tests are completed by a licensed engineer whom checks these systems and provides a report for each.  These tests are to be paid by the Seller in most cases and if they do fail, it is up for negotiation or retests.  Even if your financing does not require it, the water and septic tests are useful information and will be necessary when it comes time to sell your home.

John Thompson

John Thompson

Broker, Alpine

John has been involved in real estate since 2012. He has served markets in both Alaska and Washington. 

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