In today’s market, few buyers make contingency-free offers. A contingency is an event, like the buyer’s loan approval, that must be satisfied in order for the transaction to close.
The purchase contract should specify a deadline for contingency removal. The time period is negotiable; it’s whatever the buyers and sellers agree to. Sellers usually want as short a contingency period as possible so that they can make plans. Buyers, on the other hand, often want as much time as they can get to inspect the property, line up financing or sell another home.
Although sellers prefer short contingencies, it’s wise to agree to a realistic timeframe. Buyers who feel under pressure to perform more quickly than seems reasonable can get cold feet and back out.
The current credit crisis has extended the time it takes to fully approve a mortgage. Lenders require more documentation from buyers. In some cases, they want copies of W-2s and income tax returns sent directly from the IRS before they’ll grant final approval. This alone can add five days to the loan approval process. Sometimes the lenders’ underwriters request a second or review appraisal to validate that the buyers are not overpaying. This can also delay the process.
In some purchase contracts, the financing contingency doesn’t expire on a certain date, but is in force until the buyers’ lender funds the mortgage. Funding usually occurs at, or the day before, closing.
This can be problematic for sellers who won’t know for sure if their home is sold until it closes. Given the state of the current financing market, buyers and sellers often don’t know if the deal will close until the last minute regardless of a contingency deadline.
Sellers who are presented with an offer from a well-qualified buyer who needs the financing contingency to run until the loan is funded should request the right to stay in possession of the home for a time after closing. This way the sellers don’t have to move out in order to provide the house to the buyers at closing only to find out at the last minute that they need to move back in again because the deal didn’t close.
What happens if a contingency isn’t removed? The answer depends on how the contract is written and on the situation. For example, some contracts don’t require the buyers to take any action if they are removing a contingency. This is referred to as the passive method of contingency removal.
HOUSE HUNTING TIP: A preferred method of contingency removal is the active method. In this case, the contract requires the parties to remove contingencies in writing. This way both buyers and sellers know affirmatively that contingencies have been removed. It makes planning for the ultimate move a lot easier.
Buyers or sellers whose contract requires the active method of contingency removal should request an extension in writing if they are planning to move forward but need more time to satisfy a contingency. If a contingency is not removed on time, check the purchase contract, which should include a clause to cover this situation.
Sellers often erroneously assume that they can keep the deposit if the buyers don’t remove a contingency. Many contingency clauses provide for the buyers’ deposit to be returned to them if they try but are unable to satisfy a contingency. Check with a knowledgeable real estate attorney to see who’s entitled to the buyers’ deposit.
THE CLOSING: It’s risky to assume that the buyers aren’t going to close the deal because they haven’t removed a contingency on time. Be sure to seek legal counsel about the status of your contract before entering into a contract with someone else.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide," Chronicle Books.
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