Contract Contingencies 101

Contingencies are the formal clause in the Contract to Buy and Sell which state that particular conditions must be met by either the buyer or the seller in order for the parties to proceed to the next step in the contract. Unless the seller finances the deal, in the Colorado Contract to Buy and Sell, contingencies are generally written to protect buyers, not sellers. There are several standard contingencies which are commonly used in the Colorado Contract to Buy and Sell.

1. Home Inspection
Every contract should be written with the inspection contingency. The inspection should be completed as soon as possible (usually 5-7 days) after mutual execution of the contract. I like to structure my purchase contracts in a way that allows buyers to have three days following the inspection to try and resolve any unsatisfactory items found by an inspector. If resolution of the unsatisfactory finding is impossible, the buyers have two choices: continue with the purchase and accept the house “as-is” without any seller repairs or credits toward repairs, or cancel the contract and receive their earnest money back.

2. Appraisal
Appraisal contingency is very important in today’s real estate market. And since no lender will lend you more money than the home is worth, it can be nerve-wracking to wait for appraisal results. Your lender will have an appraiser go out to the property and perform an appraisal inspection to determine home’s value based on the building costs, square footage, condition and recent comparable sales before approving and funding your loan. In cases where the home appraises lower than its negotiated purchase price, buyers and sellers will face several choices including termination of the contract and purchase price renegotiation. HomePath properties do not require an appraisal, while the appraisal is always optional when paying cash.

3. Preliminary Title Report
Title contingency allows buyers to investigate property easements, chain of title, judgments and any monetary liens on record, including the ability of the seller to transfer clean title to the buyer. Sometimes homes can be located in special tax districts. Buyers get to review the tax certificate they receive with the title paperwork and have the right to back out of the deal if they do not wish to continue with the purchase of a property in the special tax district.

4. Survey or Improvement Location Certificate
Surveys and ILCs can help parties establish lot boundaries or, for example, show if a neighbor’s garage or deck are encroaching on the property. The survey and ILC are written onto the purchase contract as contingencies and allow buyers to back out of the sale if the findings are unsatisfactory to them and are unresolvable.

5. Examination of Homeowner Association Documents
Also known as CIC documents contingency, buyers get an opportunity to obtain a copy of all homeowner association documents, including rules, regulations and meeting minutes. If the buyers find HOA rules and regulations unsatisfactory for any reason, they may terminate the contract and receive their earnest money back.

6. Loan Approval Deadline
Also known as loan approval contingency, this clause in the contract means that the purchase of real estate is contingent upon or subject to the buyer getting a mortgage loan for the purchase. Typically this contingency calls for a buyer to apply for a loan within a certain period of time after the contract is signed. Since most people who buy a house require financing to complete their purchase, mortgage contingencies are one of the most common types of contingencies in real estate contracts. If financing is not secured, the buyer may unilaterally cancel the contract by stating that his or her condition has not or will not be satisfied.

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