Protecting Yourself With Contingencies

Think of a contingency clause as insurance. Once you find a home and make an offer, you hope everything will go smoothly; but in case it doesn’t, you have a contingency clause in place that allows you to back out of the contract without losing money.

Most agreements already have a few key contingency clauses in place to protect against the bigger things—such as a lower-than-anticipated home appraisal—but there are contingencies that go beyond the norm. If you’re about to make an offer, consider all of your options.

Standard contingencies

Some contingency clauses are commonly used when making an offer. Some examples:

Home inspection: This gives the buyer the right to order a professional home inspection and back out of the sale if major unreported damage is found.

Appraisal: The buyer won’t be obligated to buy the home if the appraisal value is lower than the asking price.

Mortgage availability: This gives the buyer time to find financing for the home. If the buyer can’t find financing, either party can cancel the deal. IN today's market, it is best to have all of your financing in place in advance.

Atypical contingencies

You don’t have to stick with the standard contingency clauses. Depending on your situation, it may make sense to add additional clauses to the agreement. Some examples:

HOA rules: If you’re considering an area with a homeowners association, it may be prudent to require a copy of the HOA guidelines before you buy. HOA fees vary and if the dues are high, your annual homeownership costs will go up. Many HOAs also have rules on parking, landscaping, paint colors, and even holiday decorations. If you aren’t happy with the HOA, you’ll want the option to back out of the deal.

Selling your current home: If you’re trying to sell your home before you buy another one, you may want to put a selling contingency in place. If you’re unable to sell your current home within a certain time frame, this contingency allows you to cancel your offer.

Moving furniture early: With this contingency, you and the seller agree to allow you to move personal property in (or move in entirely) earlier than the seller anticipated. You may have to agree to pay the seller rent if you move in before closing, but it will spare you from putting your belongings in storage and finding temporary lodging.

Adding contingency clauses

A basic offer won’t automatically contain any contingency clauses. While many Realtors® include some standard clauses in every offer, you should work with your agent to make sure you’re including contingencies for everything you can anticipate before you submit your offer.

Once you’ve submitted the offer, keep in mind that the seller may submit a counteroffer with his or her own contingency clauses as well.

If you have a need for a real estate professional, please contact me. I would also appreciate your vote of confidence by passing my name to anyone you may know who would benefit from my services.

                       408.687.2026 |  Julie@JulieWyss.com | www.JulieWyss.com

The Purchase Agreement

You've found a home you love and you're offer has been accepted. Now what?

Your agent will use a standard form of Purchase Agreement, developed by the Association of Realtors ® , a local Association of Realtors ® , or a private publishing company, depending on the custom in the area. You can make changes – but the seller must agree to each of the changes you make.

In the United States, oral contracts are not enforceable – real estate contracts must be in writing. Even if you give me, your agent, permission to bargain on your behalf, I must have a Purchase Agreement signed by all buyers before I can present your offer.

When you read the Purchase Agreement, try to imagine yourself as an independent party who has no knowledge of the transaction other than what’s included in the contract. Is the meaning of each clause clear? For example, to avoid miscommunication list all personal property you expect to be included in the transaction. Also, it’s a good idea to stipulate the exact date and time of possession – if you’re not specific, you and your moving van could arrive and find that the seller still inside the home!

Specify in the contract that the seller is obligated to repair any damage (along with the conditions causing such damage) noted in the pest control report and the reports of other inspections.

Elements in the Purchase Agreement

Sales Price
Self-explanatory, but still the most important term.

Earnest money
Along with your Purchase Agreement, you will submit earnest money to demonstrate your seriousness about the home.  “Earnest Money” is generally between 1% and 5% of the purchase price. If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal against the terms of the contract, you may have to forfeit the entire amount.

Title
"Title" refers to the legal ownership. The seller should provide title, free and clear of claims by others not acceptable to you, the buyer. Title insurance will assure that the home is free of "unacceptable liens" or "encumbrances."  It’s negotiable who will pay for the title insurance policy.

Mortgage Clause
A clause which specifies that the obtaining of a mortgage loan on the property on terms and conditions acceptable to you is a condition of the sale, and provides for the refund of your deposit if you fail to get the mortgage loan.

Pest Inspection
This clause provides for a pest control inspection and report by a licensed pest control operator. Sometimes sellers will provide this report prior to the purchase agreement. If not, it provides for a method of allocating whether seller, buyer or both will pay for the repairs disclosed by the report. Your lender may require a certificate from a qualified inspector stating that the property is free from termites, pests and dry rot.

Home Inspection
I strongly recommend an inspection and written report by a home inspector who is a licensed general contractor to determine the condition of plumbing, heating, cooling and electrical systems, the structure of the home, the grading, roof, siding, windows and doors. Most buyers prefer to pay for inspections (generally between $300 - $500) so that it’s clear that the inspector is working for them, not the seller. I also strongly recommend that you request any such additional inspections as may be recommended by your home inspector, such as a separate roof inspection, foundation or soils inspection, pool inspection, etc. These additional inspections may reveal conditions or defects beyond the ability of a general home inspector to ascertain.

Other Disclosure and Inspection Terms
See the section on "What you need to know" for a detailed discussion of these disclosure and inspection items.

Contingencies
You can specify, in your Purchase Agreement, that certain conditions must be met before the sale goes through. Contingencies are crucial, so be sure to speak up and tell me what’s important to you, so that all of your concerns are reflected in the offer. They may include:

Your ability to obtain specific financing from a lending institution. This contingency will ensure that if you can’t find the loan, you will not be bound by the contract.
That the home inspector you hire provides a satisfactory report within 10 days (for example) after the seller accepts your offer. With the proper contingency, if the report does not satisfy you, the contract becomes void.

The sale of your existing home.
Obviously, in a slower home sale market, sellers are more willing to accept contingencies than they are during more active circumstances. Too many contingencies in a strong real estate market may prevent your offer from being accepted. Make sure your contingencies are clear.
Earnest Money
This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show "good faith." The real estate agent usually holds the deposit, the amount of which varies from community to community. This amount will become part of the down payment.

Escrow Company
In most instances, the buyer will select the escrow company which is also the title company providing the title insurance policy after close of escrow. In some counties where the custom is for the seller to pay for the title insurance policy, the seller will select the escrow and title company.

Closing Costs
You can negotiate which closing costs you will pay and which will be paid by the seller. However, be aware that longstanding custom regarding the handling of the allocation of these costs makes many of them hard to negotiate on terms different from local custom. If a seller was obligated to pay a certain closing cost when he or she bought the property, they will expect you, the buyer, to pay the same cost on your purchase. See the section on "Who Pays What?" which details these cost allocations in the area we serve.

Withdrawing an offer
In most cases the buyer may withdraw an offer right up until the moment the offer is accepted. Consult us as to the best and safest way to withdraw your offer.

The seller’s response to the offer
You will have a binding contract if the seller, upon receiving the written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as the signed offer is delivered to you or me, your agent. If the offer is rejected, then the offer is no longer valid. If the seller likes everything except the sale price, or the proposed closing date, or the terms of your offer, you may receive a written counteroffer, with the changes the seller prefers. You are then free to accept or reject the counteroffer, or even to make your own counteroffer.

Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal and that final, unchanged document is delivered to the other party or their agent.

How the seller may counteroffer
The buyer and seller can negotiate and agree about any of the terms, conditions, costs and who pays for them. Some terms and conditions that are negotiable include:

• Termite inspection fee and costs to repair any damage
• Closing costs
• Points to the buyer’s lender
• Buyer’s broker
• Repairs required by the lender
• Repairs of conditions or defects disclosed by the seller, uncovered by inspectors, or required by governmental agencies
• Date for the close of escrow
• Date and time for possession by buyer
• A holding over, or rent back, by seller after close of escrow

If you have a need for a real estate professional, please contact me. I would also appreciate your vote of confidence by passing my name to anyone you may know who would benefit from my services.

408.687.2026    www.JulieWyss.comhttp://www.juliewyss.com     Julie@JulieWyss.com