Wednesday, August 29, 2007

C is for Contingency

A contingency is simply a condition that must be satisfied in order for the contract to execute.

In real estate, there are several common contingencies, as well as a gazillion uncommon ones. In this post, we are only going to go over a few common contingencies. As I said previously, a contingency is a condition that must be satisfied for the contract to execute. In math, it would be an "If/Then." If the contingency is satisfied, then the contract moves forward.

The most common contingency we see is an inspection contingency, or a variation. Here in Georgia, there are three different options that fall under the umbrella term of inspection contingency. The first option would be an As-is sale. In an as-is sale, the property is purchased as-is, effectively without an inspection contingency. The next level would be the traditional sold with right to request repairs. In this case, there is an inspection period, at the end of which, a list of requested repairs are submitted to the seller by the buyer, and the negotiations start anew. The most far reaching version is sold with right to terminate. With a right to terminate, the buyer can terminate the sale during the predetermined period, for any reason, or no reason. The buyer may also submit an Amendment to Address Concerns. This would function largely the same as the Amendment to Remove Inspection Contingency does for the sold with right to request repairs contingency. It allows the buyer to negotiate for issues that are found during the inspection or during due diligence.

The next most common contingency that we deal with is the financing contingency. The buyer is required to state what type of financing they are seeking, or if they are seeking a cash sale. In a cash sale, there is no contingency for financing. More common, the buyer needs to get some sort of financing in order for them to purchase the home. In this case, the buyer will include the percentage of financing (Loan to Value, or LTV), the maximum interest rate, and the term, as well as whether it is fixed are adjustable. Other details may also be required. Finally, there will be limits placed on the timeframe for application for loan, pre-approval letter, and underwriting approval. These can be negotiated in the contract.

A less common contingency, but one that is very important in this market is a Sale or Lease of Buyer's Property. With a sale contingency, the buyer only is required to complete the sale if their current home sells within the period set about by the contract. In some cases, this may also include a Kick-out Provision. The kick-out provision allows the seller to continue to market the property, and if they receive another acceptable contract, the first buyer has a specified period of time to drop their sale contingency, or the seller can terminate the contract.

Finally, there is the Back-up Agreement. If the property is already under contract, this allows a buyer to be next in line shouls the current contract fail. In a hot market, this is a great tool to use.

This is by no means an in-depth discussion of the various contingencies, but rather an overview with a quick description of each. This will allow a new buyer or seller to know what types of contingencies they might face in buying or selling real estate.

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