THE HOME BUYING & SELLING PROCESS - INSPECTIONS AND CONTINGENCIES

The most popular contingency in the process of buying or selling a home is the inspection. However, there are additional contingencies that are always part of the home buying and selling process and others that are specific to the transaction.

A contingency is a specific event or condition that must be completed or satisfied for the purchase-sale contract to be valid. Some contingencies require action within a certain time and others may be simply to confirm that something does or doesn’t exist.

A contingency generally includes the following elements:

• • An action necessary to satisfy the contingency
• • The time frame within which the action is to be completed
• • Method(s) to remove the contingency
• • Who bears responsibility for any costs

Contingencies can benefit the seller or the buyer. When selling your home, you will want the buyer to submit earnest money quickly. This shows good faith even though the money will go towards the purchase price. If he cannot produce the earnest money within the agreed time frame, you will want the option to terminate and move on.

As a buyer, you will want to inspect the home and have an opportunity to renegotiate or back out of the agreement if it discovers something that reduces the value of the home.

Here is a list of common contingencies found in a purchase-sale contract:

• • Loans
• • Inspections
• • Appraisals
• • Title
• • Homeowner Association Documents

The contract includes a section allowing the buyer the option to terminate the agreement for any reason within a certain time period. Usually this option period is 7-10 days. The seller will normally require a small option fee for this privilege.

The option period gives the buyer time to get inspections of the property and to bring it to the seller’s attention. If issues are found from inspections that are material to the contract, the buyer can renegotiate or back out of the deal without losing earnest money.

Another example is if the buyer cannot obtain financing. The contingency is normally a condition of approval from a lender. If no lender is willing to loan the needed money to the buyer, the contract can be terminated. This can occur if the appraised value of the property is less than the sales price. Sellers often require a loan preapproval before they will accept an offer.

The purchase-sales contract has provisions to include addendum to change or modify the contract. Generally, addenda add material and requirements to the contract. Addenda require a minimum amount of information to be valid and many are forms with checkboxes to make completing them easier.

Among the many addenda available for the standard Texas One To Four Family Residential (Resale) contract are:

• • Third Party Financing
• • Seller Financing
• • Property Subject to Mandatory Membership in a Property Owners Association
• • Buyer's Temporary Residential Lease
• • Loan Assumption
• • Sale of Other Property by buyer
• • "Back-Up" Contract

A buyer will want the seller to produce a marketable title to the property. The title/escrow company will perform a title search to discover any clouds on the title. A cloud is an encumbrance or other condition of title that could allow a third party to make a claim on the property.

A title company may take the risk of a defective title by issuing a title insurance policy. This doesn’t cure the defect, but it allows the title company to deal with any issues on the title instead of the owner. If the defect is not insurable by the title company, the buyer will want to renegotiate or back out of the contract.

Dealing with contingencies are the most important actions that take place during the escrow period. The importance is magnified by the essence of timing included in the contract. Your knowledge of these details will help you to be prepared for any action needed to successfully close on the home.