Contingency Removal Process
What are contingencies? These are clauses in your contract that give you an out from purchasing a property if something unforeseen is discovered. They protect you from losing your earnest money by mitigating unexpected concerns such as a low appraisal, a major issue with the property, or the inability to sell your current home. Each contingency has a specified deadline and is removed in writing.
Though you may not have all of the contingencies listed below, it is important to understand the standard clauses found in many buyer purchase agreements.
- Seller Disclosure Statements. The contract is contingent upon the buyer’s approval of the property disclosure statements as prepared and signed by the seller. There is an automatic three day right of rescission when the documents are received.
- Inspection Contingency. You have the opportunity to hire qualified inspection companies to determine the condition of the property. This includes, but is not limited to, termite/pest inspections, general home inspections, chimney inspections, pool/spa inspections, roof inspections, and others as needed. Once the property has been inspected and we have reviewed the inspection reports together, we may develop a Buyer Request for Repairs. It is important to note that repairs are usually negotiable unless the offer was written for an “As Is” purchase. Once we reach agreement on any requested repairs, the inspection contingency is removed. For a refresher on the specifics covered in the various inspections, click here.
- Geologic & Environmental and California Tax Reports. These reports, prepared by an independent geologist, show whether the property is located in earthquake zones, fire zones, flood zones, industrial use zones, and other zones as defined by the State. It will also provide the current property tax assessment rate for the property, along with any additional assessments that are paid as part of the property taxes. All of these documents should be reviewed carefully. These documents will typically be removed as a contingency at the same time as the inspection contingency.
- Appraisal contingency. The contract may be contingent upon the property appraising at the price you offered to pay for the home. If the appraisal falls short of the sales price, you are not obligated to proceed with the purchase. It is vital that the lender orders the appraisal as soon as possible after we have a fully ratified purchase contract in order to meet this contingency removal date.
- Loan contingency. The purchase contract is likely contingent upon the buyer’s ability to obtain a loan under the terms indicated in the purchase agreement. You are required to complete a loan application with the lender immediately, providing whatever information is needed to complete your loan request. Once the loan is approved, you should confirm with your mortgage lender that you can confidently remove your loan contingency, and that there are no outstanding conditions of the approval that could prevent you from closing escrow.
- Preliminary Title Report. The contract is also contingent upon your review and approval of the Preliminary Title Report as provided by the title company. This report shows all matters of public record that are documented against the property, including easements, common maintenance agreements, liens, etc. If there are CC&R’s (recorded Conditions, Covenants, and Restrictions) on the property, you have the right to review them to see if there are any restrictions to which you object. CC&Rs are limitations and rules placed on a group of homes by a builder, developer, neighborhood association and/or Homeowner’s Association. All condos and townhomes have CC&Rs, as do most planned unit developments and established neighborhoods.
- HOA Documents (if applicable). Lastly, if the property has a Homeowner’s Association, then the purchase is contingent upon your review and acceptance of the Homeowner’s Association documents. These documents will typically include the Budget, By Laws, Articles of Incorporation, Financials, and Minutes from past meetings. The minutes are usually the most important of these items, as they are a record of issues that have been raised at the Homeowner Association meetings.
Once all contingencies are removed, you are saying you understand and accept the property in its current condition (subject to any agreed upon repairs by the seller) and that you are going to close escrow. At that point, your deposit is theoretically at risk, so any failure to close escrow on your part might lead to losing all or part of your deposit.
The appraisal is a key piece of the purchase agreement and will be required by your lender if you are financing your home purchase. Let’s take a moment to review the importance of the appraisal in more detail.