The San Marino Real Estate Report, as seen weekly in the San Marino Tribune
The California Residential Purchase Agreement incorporates a series of contingency periods, intended to give buyers time to perform a few important tasks. During the duration of the contingency period (most have a default of 17 days), the buyer can cancel the agreement and still get back their 3% deposit. For each contingency, there is space provided on the contract to specify the number of days needed for that task. During the initial negotiations between the buyer and seller, it is not unusual for the seller to ask for shortened contingency periods. The sooner the contingencies are cleared, the sooner a seller can breathe easily, knowing that the buyer is locked in and the sale should proceed to closing.
Although there are other contingencies involved with a home sale, the following are the most common to be incorporated into a purchase agreement:
Buyer Inspection Contingency:
The buyer inspection contingency allows time for buyers to bring in professionals to thoroughly inspect the property and uncover any problems or defects that might exist. A good home inspector is all that most buyers need. These detail-oriented professionals scour the entire house and yard, shedding light on the condition of the property. If there is a concern over one aspect of the home, the inspector will suggest calling in a specialist to further investigate the issue.
It is during the buyer inspection period that the buyer can ask the seller to repair items or provide a credit so that they can complete the repairs once they own the home. Once the negotiations over repairs are complete, the buyer is expected to remove the buyer inspection contingency. Since the process of buyer investigations can either lead to the buyer backing out or requesting a credit from the seller, this is the contingency that many sellers try to shorten.
Getting a loan in this day in age is no easy task. Swinging from the era when most anyone could get a loan, even up to 100% of the purchase price, lenders have tightened their guidelines and made it difficult for many people to get financing for a home purchase. Although the default period for the loan contingency is 17 days, many banks are taking even longer to provide final loan approval to the buyer.
Separate from the loan contingency but intimately connected, the appraisal contingency provides time for the buyer’s bank to determine the appraised value of the property. The appraisal process in today’s market is problematic. Appraisers have become much more stringent in their evaluations, and it is not uncommon for an appraisal to come in under value, which will affect the buyer’s ability to get their loan. With the ample number of short sales and bank-owned sales occurring, home values in many communities are being dragged down.
Most buyers are petrified that the contingency periods will run out before they have completed all the necessary due diligence to remove them. The good news for buyers is that contingency periods continue to run until the buyer removes them or is forced to remove them through a “Notice to Perform” issued by the seller (gives the buyer 48 hours to remove the contingencies or cancel). If the seller never requires that they be removed and the buyer never voluntarily removes them, contingencies stay in affect all the way to closing. The only way that a buyer can lose their deposit is if they have removed the contingencies and then are unable to complete the deal.
Setting and monitoring contingency periods is a very important part of a successful real estate transaction. They are in place for the protection of both the buyer and seller.