It’s time to remove the contingencies. What contingencies?

When you are in contract to purchase a home, your Realtor® will advise you that there are several contingencies that need to be removed within prescribed time frames.

What exactly are contingencies? In real estate context, contingencies are provisions in the contract which protect the buyer and seller, and allow them to back out of the purchase when these conditions are not met. Buyers are more involved in clearing contingencies as they are given a period within which to do their due diligence and thoroughly inspect the property they are buying.

• When a buyer removes a certain contingency, he cannot go back and cancel the contract by reason of this very contingency that has been cleared.
  
  
• When a buyer removes ALL contingencies, he is legally bound by the contract to complete the purchase transaction, lest he be in breach.

In a standard purchase contract, following are the important contingencies that the buyer has to remove within 17 days into the contract:

• Loan contingency. Before removing this contingency, the buyer needs to make sure that his loan application has underwriting approval, and any remaining conditions, if any, are pretty straightforward.
  
  
• Appraisal contingency. This is correlated to the loan contingency, since underwriting will not approve a loan if the home does not appraise for at least the purchase price.
  
  
• Inspection contingency. Buyer may choose the appropriate inspections he needs to be confident that the house he is buying is in an acceptable condition. The most common are property, termite and roof inspections. Depending on the results of these initial investigations, further tests or inspections may be conducted as necessary.

What if the contingencies are not removed? It is important that the buyer understands that when all contingencies are removed, he is saying that he has an approved loan, the property has appraised out, and he accepts the property in its present condition. If not removed, there are several recourses:

• Buyer can cancel the contract.
  
  
• Buyer may request that repairs be made by the seller.
  
  
• Seller can cancel the contract, after giving a notice to the buyer to remove contingencies within 2 days.

There are other contingencies that may apply during the buyer's home purchase period: Disclosure contingency, HOA disclosures, Title report, Contingency for sale of buyer's property, Contingency for seller's purchase of a home, etc.

What happens if contingencies have been removed and the buyer cancels? If this happens, the buyer is bound to lose his earnest money deposit. Seller can retain, as liquidated damages, the buyer's escrow deposit up to 3% of the purchase price. Any amount in excess will be returned to the buyer. This is a pretty costly cancellation. That's why the buyer is always cautioned to wait until the last day before removing contingencies.

Make sure you consult with a knowledgeable Realtor® when going into a purchase contract. Avoid getting into legal issues by following contingency timelines.