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What is a Contingency?

Many industries have their own languages. Real estate is no exception. That is what our question this week deals with.

What are contingencies?

Contingencies in a contract are a legal way of saying that unless certain things happen you will not fulfill your end of the agreement. For instance, say you hire a person to do some work for you around your home and you make the agreement that you will not pay him until all of the work is completed satisfactorily. That is a contingency. In other words, you have a contract to pay, but only if all of the work is done to your satisfaction. In other words, if you are not satisfied, no matter how much work was done there is no obligation to pay.

Where contingencies come into play in a real estate contract is as a way to qualify your obligation to complete the purchase and protect the parties in the contract. In a real estate contract almost all for the contingencies must be fulfilled or removed from the contract within a certain timeframe known as the contingency period.

While it is true that most contingencies are designed to protect the buyer, there are a few that protect the seller's obligation to complete the sale to the buyer. For instance, if after the contingency period, it becomes evident that the buyer is not working toward the completion of the sale, the seller may cancel the contract. A buyer has the same contingencies and a few more. For instance if the sellers fails to deliver the required disclosures to the buyer within the contingency period, he may cancel. Also if during the contingency period, the buyer inspects the property, and finds it unsatisfactory, or he can not get the loan, or the property fails to appraise for a satisfactory amount, he may cancel. Next week we will talk about the effect that waiving or removing a contingency can have on the contract.

Do you have a question? Are you ready to make a move in this market? Please call 916-376-9328 or email Nick@bignicksells.com. I would be happy to help. I don't want you to miss the next boom.

Posted by Nick Hoddinott on 12/13/2007 03:13 PM

Comments (2)

contingencies, sacramento real estate, yolo real estate

2 Comments on What is a Contingency?

SEP

Hello,

I hope you can answer a question for us regarding a contingency.

We (sellers) have been tied up with these nightmare (buyers) for 6 months. One problem after another. We have done everything they have asked. They were in escrow and backed stating their realtor didn't think the property was worth the appraised amount. Our question is who gets to keep the deposit when:

LOAN CONTINGENCY REMOVAL: (i) Within 7 (or ¨ _______) Days After Acceptance, Buyer Shall as specified in paragraph 14 , remove the loan contingency or cancel this Agreement; OR (ii) (if checked) x the loan contingency shall remain in effect until the designated loans are funded.

Thank you.

Well the fact that the Box marked "the loan contingency shall remain in effect until the designated loans are funded," appears to be checked tells me, that your agent may have allowed a loop hole for them to walk away from the contract. So at this point you have a few options:

Let the security deposit go
Sue in court, small claims if possible, for a judge to order the security deposit to you
Sue for specific performance

The thing is, as long as the security deposit is in question it stops you from legally accepting another offer on the property. The reason is that as long as the disposition of the depost is in question, you still have a legally executable contract, and since you can't sell you home to more than one contractual entity, you are faced with the decision of whether or not you wish to wait that long to get the money or just give it back and try to get a new offer.

In suits for specific performance, you are basically going to court and asking a judge to force them to go through with the contract. Again, you cannot enter into another contract to sell your home until this suit is resolved.

The loop hole I mentioned is this. All they need to do if that loan contingency is still in effect is go to court when you sue them and convince the judge that even though the appraisal showed adequate value, the loan could not be funded. This is not that difficult to do, there are a number of things that would stop the loan from funding that you might not know about, some may or may not be the buyers fault, and may or may not be real. In other words if they and their lender agree that the loan can't be funded then the lender writes a letter stating that it can not be funded and the case is quite possibly closed.

In closing, I hope this answers the question adequatley. I also hope this demonstrates the value of making sure your agent understands contingencies in a contract. I mention this as in my experience as a broker interviewing agents, I am shocked not only how many do not know how they work, but would give their clients bad advice if asked, just out of ignorance. Needless to say, they don't work for me. If you have furhter questions, please feel free to drop me a line or call.

Nick

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