Facts About Real Estate Contingencies

Transcript from podcast:

Contingencies episode #3

In this episode we are going to talk about real estate contingencies I get a lot of recurring questions about contingency periods, what happens when they expire, and how that affects the deposit, so I figured it would be good to do a primer that covers important factors to consider when it comes to real estate contingencies. So among the many contingencies in a real estate transaction there are three big ones that everyone’s paying attention to and the first is the buyer inspection contingency which lasts 17 days from acceptance, the next is the buyer appraisal contingency which also last 17 days from acceptance, and then the third is the buyer loan contingency which lasts 21 days from acceptance.

Before I go further I should actually talk about what constitutes acceptance because this actually gets confused fairly commonly, what happens is on a purchase contract if you look at the very top there’s a little space for the day prepared and that’s the date that the agent write up the contract I’ll see a mistake where someone will just jump back into a transaction to the paperwork two or three weeks in and they’ll look at that date because it’s just right there on page one and they’’ll count the contingency period from that date which is incorrect. Then of course the buyer signs that at the end of the purchase contract and the date the buyer signs may or may not be the same date on the top that they prepared when the offer was filled out by the agent and neither of those dates matter quite frankly all that matters is when the seller signed that contract which likely will be a completely different date because the agents going to write the offer they’re going to give it to the buyer to sign the buyers going to send to the seller and the seller may sit on it for a day or two or whatever then the seller is going to sign and at that point the offer becomes accepted it’s ratified as the other the other signature on it that’s needed in order to be fully executed so the date that the seller signs that contract that’s when your account from now the same idea applies to counters so let’s say the cat the seller gets the offer from the buyer decides they want to do a counter the seller writes up a counter offer in sent it to the buyer another buyer might sit on it for a couple days well if the buyer decides after a couple days of thinking that they like that counter and they sign it and then they date it well that’s the date that this whole contract you can fully executed that’s the date of acceptance and that last signature needed in order to fully execute. Counter offer the date by that signature by the other party that’s the day that you count from so it’s really whenever the last party needed in order to execute the document signs whatever date that that party signs that’s the date in which will count from to determine the number of days in that continue CPR the starting date all right so just important to when counting when when coming back into a transaction a couple weeks in because you want to remove contingencies it’s important to look at the start date and end Trace that trail of counter-offers and figure out when the last signature was done because often I see mistakes made where people just look at it the purchase contract in forget that account or with sign my book party both parties 2 or 3 days later you know one chip also is got in house when we do the in-house transaction coordinator we have an Excel spreadsheet and the second that we start a new transaction we find that date and we put it in one of the first columns on that spreadsheet that way as we go through the transaction and hit all the milestones we can always refer back to that date and where the earlier columns on a spreadsheet so we always know how many days into a transaction we are so it’s very helpful in my opinion to write down that that magical starting date somewhere that you can quickly refer to back to it so that you’ll always know how many days into a transaction you are all right so what happens when a contingency is not removed well the simple answer, the quick answer is nothing happens because contingencies don’t expire naturally on their own they stay in place until they’re removed by the buyer in so let’s say 17 days arrives your 17 days into a transaction that marks the end of the inspection and Appraisal contingency. Well it’s incumbent upon the seller to enforce was periods because again those contingencies will stay in place until the buyer removes them and often buyers are in a huge hurry to remove them because hey they want all the time they can get to do their inspection and get their loan also the buyer’s deposit is refundable 100% refundable as long as there’s a contingency in place so another reason why it’s incumbent upon the seller is that they don’t have the the full commitment from the buyer until the buyer has skin in the game and the buyers have skin in the game until they removed all their contingencies and they know that their deposit is in a non-refundable position so the buyer knows that they need to be proactive about going to transaction closed because if not they’ll lose their deposit now the buyer’s deposit could be jeopardized if they wait so long that the close of escrow date comes and goes and they don’t actually close escrow and fulfill their purchase then they risk it being in default and that’s another situation but the buyers defaulting on the purchase they made a commitment to we’re talking about is merely just the contingencies which basically is an escape clause for the buyer until they’re removed so what can a seller do to enforce contingency periods well the seller for the most part stuck on a real estate transaction the buyer can back out they have these contingencies in place the seller doesn’t the seller can’t really right to the buyer 2 weeks until the transaction say you know what thought about it don’t want to move after all let’s cancel the sellers stuck the buyer on the other hand they of course come back out to the contingencies are removed so what the seller needs to do is send a notice to perform to the buyer requesting that the buyer remove contingencies the newest perform document has a two-day window that it gives the buyer to perform the specified action or the seller can cancel so here’s an interesting thing that I’ve seen some agents do what’s a good is 17 day contingency. Now let’s say the seller’s very eager to have the buyer remove contingencies what’s a the sellers just very anxious or the buyer possibly backing out well the seller can wait 17 days and see what happens and at the end of the seventeenth day if they don’t get a contingency removal the seller can then send a notice to perform but then the seller has to wait two more days for the buyer to make good on that nose for form document because if the seller sends it then the buyer has two days to deliver the contingency removal and the buyer effectively bought themselves two more days and 19 day contingency. Or the seller can send that notice to perform to the buyer on day 15 and in anticipation that on day 17 all the continue the specified contingency must be removed the benefit of that is that if the buyer doesn’t deliver the contingency removal then the seller can immediately cancel the sellers two day waiting. Where the seller waits for the buyer to make good on removing contingencies takes place during the last two days of the contingency. So that way if the last day of the contingency. The buyer doesn’t deliver the contingency removal the seller does not have to wait they’ve already done their two days and they can immediately cancel if they want unfortunately would typically happen to the sellers are lenient they don’t listen to notes perform didn’t want to be perceived as too aggressive and they go day after day after day after the contingency. They might get a verbal promise from the buyer or one way or another they are encouraged to offer more time to the buyer and it’s usually that were very close Phone call and it’s usually that were very close to closing escrow or the close of escrow date is scheduled to close of escrow date and the buyer still hasn’t remove contingencies and the lender the buyer’s lender usually is hard to reach or asking for more time or has done something that’s freaking people out so my first advice on this is get the notice for To the buyer soon as you can it has nothing to do with being aggressive it’s just a natural course of action even if the seller doesn’t want to cancel it’s good that the seller at least has that Leverage because it sends a message to the buyer that the seller is serious and wants to hear to the timelines prescribed in the contract but also what the seller needs to get out with the seller doesn’t want to be trapped what if they want to market for a backup offer or or move on with another offer entirely it’s just wise to have that no spur form sent out and demands made to the buyer to deliver a contingency removal so the buyers committed because if you’re after 3 weeks into a transaction after acceptance there’s no reason why the buyer shouldn’t have their deposit non-refundable on the line to show a commitment that they’ve spent all this seller’s time with taking the home off the market to other buyers to go down the whole process of a transaction only to back out in the end so the short answer is synonyms for form and make sure that the buyers committed with a non-refundable deposit because until that continues to use removed the fire come back out even the last minute even if it’s the day before the close of escrow the buyer can send a cancellation over and say you know what sorry to waste the last 29 days of your time but not going to work out when you can get me the loan that I wanted whatever their reason whatever the reason they can back out and they can ask for a deposit to be returned and almost certainly that deposit will be returned at entirety and if it’s not if the seller wants to be vindictive and try to hold on to the deposit there’s a California civil code section 1:05 7.3 that says that the seller can be fined for withholding that that deposit because for deposit to be returned does the buyer will typically send a cancellation form and I’ll ask for a refund of the deposit in the seller has to sign off a green to it and escrow needs mutually a mutually signed instructions for both parties that states specifically instruct escrow specifically how to release that deposit and ask her to have a deposit just sits in the escrow account so the seller can be difficult if they want and say I’ll get around a signing that that release of deposit later or they’ll refuse to maybe if that happens the seller can be subject to a penalty of fine if they do if the seller refuses to sign off on instructions for 30 days to release the buyer’s deposit inactive bad faith essentially because they’re angry and frustrated that the buyer wasted their time they can be penalized so again these sorts of boundaries when it comes to enforcing the contingency. Need to be addressed punctually in the middle of the transaction it shouldn’t be just a matter of leniency we’re at the very end everyone’s better because the buyer took advantage of the fact that the contingency doesn’t expire naturally didn’t send a contingency removal form and Drug transaction out too long so that’s why it’s it’s it’s professional courtesy that people stay on on timelines when it comes to removing contingencies all right so you’re something else to consider two sometimes you have offers from investors or a cash buyer that says they want to wave continuous he’s okay so if it’s a cash purchase the loan contingencies going to be waived right cuz you’re not getting a loan so that makes sense the appraisal contingency will very likely be waived it may not maybe that fire investor wants to have an independent third-party come out to an appraisal to make sure they’re not overpaying but Austin cash offers don’t have an appraisal contingency so what’s your big can can you see that I had brought up the inspection which is very important because most cash buyers or usually looking to do an inspection figure out what their cost to fix up a property or what they’re getting into is going to be so awesomeness still have very short inspection contingency periods send them to see him as short as three days some ice some I even see waves so some investors some offers I see investors put that they’re waiving inspection. Okay or Converse that I should add that some sellers that may have a lot of offers or have been Jaded by investors coming through and an example of this as we’ve had clients that are selling a fixer-upper and I’ll get multiple offers and investors will come in make a cash offer tie up the property and escrow and then after a few days decided they don’t want it or they’ll try to renegotiate a lower price and the property will fall out of escrow well if that happened once twice three times the seller gets really burnt out on the process we’ve had sellers have called their office and they and they tell us look we have a lot of cash offers can we counter no inspection contingency well here’s something to consider regardless of which party is interested in doing a no inspection contingency contract by law by California law once the transfer disclosure statement is delivered to the buyer the buyer has 3 days to back out this is another California code section 1102.3 yes I wrote this down at and memorize it but it’s on the last page of the transfer disclosure statement and this pertains to transactions in which disclosures are delivered to the buyer after acceptance of the offer so in Northern California for example off and disclosures will be delivered in advance well in Southern California this the overwhelming standard is that once there’s an accepted contract the seller will deliver all disclosures within the 7 Days prescribed on a purchase contract cuz he’ll see the seller has 7 days to deliver everything to the buyer 7 days from acceptance well in that case whenever that transfer schools your statement which is one of those documents is delivered to the buyer the buyer has 3 days to back out based on what they’ve seen so effectively creates a three-day inspection contingency. Beginning from when that transfers goes your statement was received from the seller so that’s just another side stripe when I wanted to bring up in regards to inspection contingency is because you see all sorts of contingencies waved and change to make offers appear more attractive there’s kind of a small Trend that right now going on where fires that are obtaining financing from A lender are waiving the appraisal contingency and the thinking behind that because it’s it’s it’s it’s silly obviously because the lender is going to require an appraisal the transaction is subject to the appraisal the lender will not furnished out loan without that appraisal coming in at the appropriate expected value so what the buyers doing is they’re trying to make their offer look more attractive by saying hey we don’t need an appraisal contingency you don’t to worry about that but there really is one because the appraisal contingency expires after 17 days from September the loan is 21 days even longer if the appraisal comes back and there’s a problem with it then that means there’s a problem with the loan so the buyer just cancels under the premise there’s an issue with obtaining a loan and they have the loan contingency in place for 21 days there for the buyer can cancel so it’s kind of a sneaky tactic in my opinion because really it’s an appraisal issue and and they’re just they’re just waving at appraisal contingency so the seller thinks it’s an issue like they’re taking some sort of worried off the sellers chest but really the buyer will just just assumed cancel Under the Sea under the guise of the loan contingency rather than appraisal so I hope that Trend doesn’t stick around because I don’t think it does anyone any good it’s somewhat deceiving it’s oh there it is in a nutshell contingencies they stay in place the buyer gets their deposit back until they’re moved by the buyer in writing it take away is that sellers Force those contingency periods the seller should send a notice to perform the seller should be on top of the transaction and forcing timelines and making sure the buyer is removing contingencies as each of those contingency periods expire and that will insure a a much smoother transaction and at the transactions going to fall apart so be it but it’s better that it falls apart earlier than later because if it’s inevitable that the transaction was going to fail would it be better for it to happen at day 21 rather than day 28 or 35 or day 41 because I’ve seen it happen I mean these will go on for weeks I’m some months after the end of the contingency. Because the sellers just let the buyer get away with it for so long and the buyers defense it’s almost like a survival Instinct for them they’re just they want the house they’re waiting on a lender sometimes lenders get flaky at the end of it because the lender will say Alex in underwriting and everyone is waiting everyone’s holding their breath the buyers one there by the specially the buyers terrified of losing their deposit because it’s a lot of money and the same time depending on the lender to get their act together to deliver so the buyers is doing everything they can to buy themselves more time because they’re afraid of losing a deposit so it’s a fine balance Define balance where at a certain point the buyer has to have a reputable lender that’s going to make sure that they know by day 21 they’re confident that they can get a loan and if not then there needs to be a serious conversation with the listing agent about extending contingency. Extending close of escrow or what the problem is exactly I hope you found this episode on contingency periods to be informative and I appreciate you for listening thank you