Caution: Removing Contingencies in a Real Estate Transaction

Ways Not to Lose Your Deposit

What are contingencies in a Real Estate Transaction and how can they hurt you? Although all the info presented here is relevant to all states, the time frames for removal are specific to California, but most states will vary within a few days of these timeframes.

Contingencies are conditions that, 1.) have to be fulfilled or removed by the buyer or seller to move forward in the contract and 2.) If said contingencies are not signed off then the buyer can lose their deposit, or either party can cancel the contract if contingencies by either party are not removed or fulfilled. The most important contingency is the standard 17 days that buyer can cancel the contract for any reason and not put their deposit in jeopardy. It is important to point out here that the seller has to perform several actions prior to the 17 days for the loss of deposit to be valid if the buyer does not remove the 17 day contingency.

What does the seller have to remove (contingencies) in the first 17 days? Seller has to fill out and deliver the Transfer Disclosure Statement (TDS) which explains the condition of the property and deliver the preliminary title report in 7 days to buyer.

In situations where buyer did not perform the 17 day removal of contingencies in time, it is important to make sure that both the preliminary title report and the TDS were delivered in time to the buyer, items that many buyers’ agents seldom leverage against the seller.

The other two important contingency removals are loan contingency (usually 21 days) and appraisal contingency (usually between 17 and 21 days). If after the 17 day standard contingency removal is not exercised, the buyer has then decided to proceed in the transaction and has most likely also removed any inspection issues and now has to only remove loan contingency and appraisal contingency. If there are any inspection concerns, then the buyer must put these in writing to the seller, through their agent, before the inspection contingency is up. This automatically extends the 17 day requirement to 22, giving the buyer 5 extra days for seller to respond.

Removing Loan contingency means that the lender has received Formal Loan Approval from the lender. On the other hand, formal loan approval does NOT mean all conditions have been met to fund the loan. Most lenders feel confident to remove loan contingency for the buyer, but sometimes there are some nasty “Prior to Doc” or “prior to close” conditions that may have to be removed before this contingency is signed off. Prior to documents means that conditions have to be met before the lender can send loan documents to escrow. Prior to close means that documents can be sent to escrow but there are still conditions. In other cases, a real estate agent or a buyer may not feel comfortable signing this off until the loan file is “Clear to Close” (synonymous with Clear to Close) means there are no more conditions needed to fund the loan. Leave this decision up to your loan agent to sign this off.

Removing appraisal contingency involves several aspects. First, it needs to be determined if the home appraised at value, 2nd, whether the property is clear of public safety or code violations and 3rd, if the property is repair free and in good condition. If all this is good, then your lender will advise you to sign off the appraisal contingency.

Making a “contingent offer” simply means that buyer is making an offer where the equity of their current home is not available because the home has not been sold. In this case, the seller may give the buyer a time period to sell the home and remove this contingency. If the home is not sold by the contingency date, the seller then can demand performance with a 3 day notice to perform.

Although it is not kosher for a buyer, encouraged by his agent, to fake contingency dates, it happens all the time to get a property into escrow. For example, a buyer may make an offer and say he can sell his home in 15 days and close in 45 days.

The buyer’s agent knows this number is not really possible but also understands that this offer will put the home into escrow eliminating other offers, except backup offers.

when the 15 days is up and the home still has not sold, he can stall for a while until the seller gives him 3 days to perform or quit. Usually, the seller will not force this form upon a buyer on the day the contingency is up, so he may turn that 15 day contingency into a 21 day or longer one, just enough time to sell his house. This is unethical, but it happens.

Never remove contingencies that are beyond the buyer’s control or where the outcome is unknown. for example, lets say there is a loan condition that requires the buyer to provide a rental agreement on the house they are moving out of so they can move into their new home. In other words they need to rent out their present home, that they own, to quaify for the new home. If the fromal approval comes in and the buyer’s agent asks to remove the loan contingency and the buyer has not rented out their home yet, then this contingency should not be removed until a renter is found.

Ralph Migliozzi,

Broker Originator Serving Northern California 

NMLS 282851 DRE #01002038

(p) 530-330-3073

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