The Importance of Contingencies

The purchase of residential real estate is the largest transaction many people ever engage in.  All too often, the details of the written agreement become obscured by all the decisions that confront the buyer upon the purchase of a home.  The purpose of this article is to bring to your attention conditions (or contingencies) which a buyer should consider as a part of the formal agreement; the typical contingency provision will permit the buyer to withdraw from an agreement and recover the full down payment if the contingency is not met.

Actually, whether the purchase is for residential or commercial purposes, most of the same considerations apply.  In the negotiation, there is nearly always a seller who is highly motivated to sell; and if a buyer has agreed to pay a price acceptable to the seller, before the agreement is signed, the buyer has great leverage in requesting reasonable contingencies.  Once the agreement is signed, the opportunity is lost.

The following are some common contingencies:

(1) Financing.  This is perhaps the most common contingency.  The buyer must specify that he or she can borrow: (a) the minimum amount necessary to complete settlement, (b) at a maximum rate of interest, (c) for a minimum term (years) of the loan, and (d) at a  maximum cost (“points”) for the loan; if a loan in that amount cannot be obtained, the buyer must have the right to opt out.  The seller typically will require the buyer to make formal application to a “responsible” lending institution within ten to 15 days from the date of the agreement, and the buyer should have 60 days from the date of the agreement to obtain a formal, binding loan commitment.  Therefore, the buyer must move with alacrity to take advantage of the contingency.  (If the buyer fails to pursue the loan commitment diligently and in a timely manner, he or she may be deemed to have waived the contingency, often with disastrous results.)

(2) Termites and Radon.  The custom in this area is for the seller at the seller’s expense to  provide certificates from reputable companies that the building is free from termites and that radon levels, if any, are below the “working level” of 0.02 (4 picocuries/liter), usually within 30 days of the date of the agreement.  The agreement should further provide that if there is termite damage, up to a certain dollar amount (to be negotiated by the parties; typically between $1,000 and $2,500) the seller will be required to make repairs or give the buyer a credit; beyond that amount  the seller may opt out of the agreement or the buyer, depending on the seriousness of the problem, may elect to accept the cost of repairs.  Generally, as to radon, ventilation, using fans, can correct problems relatively inexpensively; but it is something a buyer should know about, and it should be corrected or the buyer should have the right to cancel.

(3) Building Inspection.  The agreement should give the buyer the right (typically at the buyer’s expense) to have the building and personal property, if any, inspected for structural and non-structural defects.  The major items to be considered are the roof condition, stability of load-bearing walls, capacity and condition of both the electrical and plumbing systems, condition of the heating and air conditioning systems, and the basement for leaks or other problems.  Again, as with termites, parties should specify a maximum amount for the seller to spend in repairs, beyond which the parties have the option to terminate the agreement unless they agree otherwise.

(4) Zoning, Subdivision, and Building Permits.  This may apply more to commercial properties, but even with residential properties the buyer should know that there are no zoning or subdivision problems; and if he or she intends to renovate, add any additions, or subdivide a portion of the property, settlement under the agreement should be contingent upon the issuance of all permits.  To complete settlement without necessary building or subdivision permits is highly risky.

The foregoing conditions are by no means exhaustive, but they are those that we see most often.  By employing this most useful device, the contingency, a buyer can remove most of the mystique that can accompany a real estate transaction.  But we emphasize, negotiate them as a part of the agreement of sale, or the opportunity will be lost.

— Ken Butera

Posted in Newsletters, Real Estate / Property