When a buyer submits an offer for the purchase of a home using a Residential Purchase Agreement (or RPA), there is an entire section dedicated to the contingencies (this can be found in Section L of the RPA).
Contingencies are clauses that specify an action or requirement that must be met for the RPA to remain valid. The contract has boilerplate contingencies and how long a buyer has to remove them but all of them are negotiable. You can shorten the length of any contingency or even waive them altogether.
The first contingency listed on the RPA is the Loan Contingency which has a standard length of 17 days. This means that the buyer has 17 days to get your financing in order from the time the contract is fully executed. The buyer does not necessarily have to sign loan docs and/or fund the mortgage loan within 17 days, but they can no longer back out of the transaction due to your inability to obtain financing after the 17 days have passed. There are always exceptions to this rule, and we recommend that buyers discuss this further with their real estate agent.
For this reason, it is critical to have a reliable mortgage lender who can have the financing ready to close before removing the loan contingency. It is critical that you are responsive to your lender and provide any documents they need to get your loan approved. Ideally, you are cleared to close on your loan by the time this contingency is due.
The second contingency is the Appraisal Contingency. This allows a buyer to cancel the transaction if the home appraises for less than the contract price. If the property does not appraise, it does not mean you can’t move forward with the transaction. You can always negotiate with the seller or the buyer can move forward by paying the difference in appraised value and sales price.
The appraisal plays into your loan as the down payment requirement is based on the lower of the purchase price and the appraised value. If the appraised value comes in low and the seller will not lower the price, you will have to make your down payment plus the difference between the purchase price and appraised value.
The third contingency listed is the Investigation of Property. This is for inspections other than the appraisal such as home inspection, lead-based paint inspection, termite and/or mold inspection. This is the time allotted for you to get professionals to inspect the property and provide you with a report so you are aware of any potential problems. The seller will provide you disclosures with information based on their knowledge of the property (we go over this further below) but you should by no means rely solely on the seller’s disclosures. Get your own inspections done as well. You can use these inspections as potential negotiation tools as well. This contingency should be fully discussed with your realtor as it is relevant to the real estate transaction.
The fourth contingency listed is the Review of Seller documents. The seller is required to provide disclosures to the buyer regarding their knowledge of the home such as a leaky roof, death in the property, or the presence of mold. Other disclosures include whether the property lies near a fault line or a fire zone. These seller disclosures are lengthy but give you a strong idea of the property you are purchasing. This contingency should also be discussed with your realtor.
The fifth contingency listed is the Preliminary (“Title”) Report. The title report includes the legal description of the property along with a chain of title and a list of liens on the property. Liens can include items like unpaid taxes or mechanical liens. This gives the buyer the opportunity to know what liens are on the property and ensure that they will be addressed/paid off before ownership is canceled. If a lien won’t be paid off and the buyer does not want to pay it themselves, they can opt to cancel the transaction.
The sixth contingency is for Common Interest Disclosures. This pertains to properties that are within a Homeowners Association or HOA. Documents included here are CC&Rs, financial statements for the HOA, and the Master Insurance Policy. While having a HOA has many benefits, they can also be a drag on a property if not properly managed. If you live in a condo, a mismanaged HOA or an under-insured building could make it difficult to resell your property and drive your home value down. Your annoying neighbor who is a stickler or HOA rules may be the least of your worries.
The seventh contingency listed is the Review of Leased or liened Items. This includes items like solar panels, propane tanks, or HERO liens. If these items are not being paid off by the seller, they will become your responsibility.
That means you will be responsible for making the monthly payments as you take over ownership. Once more, if you are obtaining financing to purchase the home, your lender will likely require that their loan is in the first lien position. Essentially the seller will have to either pay off the lease/lien for any of these items or request that the lien be subordinated.
The final contingency is the Sale of the Buyer’s Property. This stipulates that the buyer needs to sell their current property first to move forward with the purchase of the new property. The buyer often needs to do this because their down payment is coming from the equity of the current property. Other times the buyer simply does not want to own multiple properties. Depending on the real estate market conditions, this could deter the seller from selecting your offer.
This is a high-level overview of the different contingencies outlined in the California Residential Purchase Agreement. For more on how this may affect your offer on a property, we recommend that you discuss this with your real estate professional. They can better advise you on how to utilize these contingencies and if/when is the appropriate time to waive them to make your offer stronger.
If you have any questions on the mortgage loan process and how to meet your Loan and/or Appraisal Contingency timeline, feel free to reach out to discuss with one of our Mortgage Loan Originators at (760) 930-0569.