Contingency clauses in a real estate contract provide the potential buyer with leverage to cancel the transaction if specified events occur. From the seller’s perspective, limiting the number and duration of the contingencies is important. Certain contingencies are standard in every agreement and others may be dependent on whether the transaction occurs in a buyer’s market.
Inspection. One of the most important contingency clauses involves the right to perform an inspection by a professional. The buyer initially reviews and accepts the seller’s disclosure form wherein the seller discloses any defects with respect to the property. Even upon receipt of a disclosure form that does not reveal significant defects, a buyer should still conduct a thorough inspection. If the inspection reveals defects, the buyer may ask for a credit or a price reduction depending on the nature and extent of the defects. If the home has significant damage that affects its marketability, the prospective buyer can annul the contract and the seller must remit the earnest money.
Loan approval and appraisal. Most real estate sales contracts contain a contingency clause that permits the buyer to cancel the purchase if the loan is not approved by the lender. The lender could reject the loan for a number of reasons, including discovering a defect in title or receiving an appraisal that is too low. The lending institution generally hires an independent appraiser to inspect and assess the value of the home. If the appraiser designates an appraisal value that is below the sale price of the house, then the mortgage lender could refuse to extend the loan. Some parties may include a specific appraisal contingency provision which would allow the buyer and seller to adjust the purchase price to match the appraisal so that the purchase can be completed.
Additional contingencies. Buyers sometimes request additional contingencies, however sellers who can attract multiple offers are less likely to grant these. For example, some buyers may request that the purchase be contingent upon the sale of their current home, especially if the sale proceeds are necessary to complete the purchase of the new home. Another contingency that a buyer may request is the right to cancel the contract if he is unable to obtain the proper insurance before closing. While lenders require buyers to obtain homeowner’s insurance, in some areas, it can be difficult or extremely costly to secure..
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.