Contingencies - The Escape Pod
Nothing could encapsulate the need to plan for disaster better than an escape pod in some high-tech space ship. But planning for unforeseen complications in purchase and sale agreements have their own escape pod in case things go dreadfully wrong, and these are called contingencies.
In real estate contracts, the buyer and seller can negotiate contingencies into the contract to help protect their interests and ensure that they do not default on the contract if some condition arises.
Put simply, these ‘contingencies’ are merely a nice way to say that I can void this contract if something doesn’t happen that I need to happen in order to complete the purchase.
To best help you understand contingencies and how they work, consider this scenario.
Buyer Allison puts in an offer to buy a home from Mike. Mike is trying to find a home to buy, so that he and his family have somewhere to move. The thought of being without a home for his children would cause him to feel uneasy.
Allison is putting $20,000 into escrow as a down payment but needs a loan in order to buy the house, so she wants a contingency to be able to back out and get her deposit back if she cannot qualify for the loan.
Mike’s Contingency – Sale cannot close until he finds a house to buy. If he cannot find a suitable house, he can cancel the contract and decide not to sell.
Allison’s Contingency – Sale cannot close until she gets approved for a loan. If she finds she doesn’t qualify, she won’t lose her deposit.
These contingencies give comfort to both parties. Usually in the contract, there is a timeframe by which parties need to remove their contingency.
For instance, the default for California purchase contracts is 17 days for inspections. This can be negotiated to be longer or negotiated to be removed completely if the property is being sold ‘as-is’. (It is important to have good representation that is confident and well acquainted with negotiations and contracts.)
If the buyer has a 17 day contingency to conduct their inspections, then on the 17th day, they must decide whether to use their contingency to cancel the contract and walk away from the property, or remove their contingency and proceed with the sale.
If after the 17 days, the buyer finds an issue, they cannot cancel because of the issue as they no longer have an inspection contingency. If a buyer has no contingencies left in the contract and doesn’t close, they could be in jeopardy of losing their deposit.
We have never had a client lose any portion of their deposit and don’t intend for this to ever occur. When conducting necessary inspections and using the guidance of a professional to negotiate proper contingencies and protections in the contract, losing a deposit should never be a concern.