Buying Tip: Contingencies:
Three common types of home buyer contingencies are defined here. Their purpose is to provide a set time period to investigate the property condition, title history and to secure your financing.
The common home buyer contingency periods are 10-15 days. The clock starts at the ratification date of the contract or when your purchase offer is accepted by the home seller.
The most important Home Buyer Contingencies you need to understand are…
- Property Condition
- Title Conditions
This is the first of the home buyer contingencies that will interest you most and is based on your investigation, 3rd party reports and seller disclosures The reports may be any number of the following: property inspection, the pest report, natural hazards disclosure report (NHDS), roof report, fireplace, well, septic and masonry report. The seller’s disclosures are not reports, however they provide you valuable insight.
This contingency is often used as leverage for price negotiations. Be cautious here. a seller can become very difficult when the buyer’s agent asked for price reductions. There are ways to use it to negotiate, however this must be done strategically and with practicality.
You may order any number of inspections you deem necessary. Raw land (dirt) properties require the most expensive and lengthy inspection process’. This would include survey, septic or perk, utility soil, geological etc.
The loan approval or financing contingency is used to give you time to gain your loan approval. There is an additional element, the appraisal contingency. These should be tied together. If the home you want to buy will appraise at a value equal to or in excess of your offer you won’t have any problem. The appraisal contingency can cause a problem if it is incorrectly used in the contract. It would be up to you to find a way to cover the difference in price. Not a fun place to be. You could negotiate with the seller and ask for help, pull money out of your pocket or hope you have another contingency to use to cancel the contract. I suggest you take measures to prevent that from happening. Make sure the contract uses language that ties the loan approval and home appraisal together.
appraisal note: The new loan disclosure process requires the lender to disclose your costs and allow you 72 hours to review them (commonly called the GFE [good faith estimate]).
The appraisal then occurs. The appraised value simply needs to meet the value that you offered for the home. We then remove appraisal and loan contingency.
The title search is performed by the title company chosen by the buyer or seller to hold escrow and perform their duties as a neutral third-party. The title report is necessary to identify any clouds on title. Clouds on title are issues that affect ownership. This would include liens (encumbrances) and ownership rights of other persons attached to the property.
In addition, the title report clarifies lot lines, easements and the ownership title chain. The title company will provide a preliminary title report during the contingency period, that you set forth in your home purchase contract, and a final report, an updated version of the preliminary report, is available prior to the close of escrow.
Condominium buyers have a few other items to consider and should have these built into any contract. The most common of these is the Home Owners Association documentation. This package will be a comprehensive accounting of the health of the community. It covers a number of the contingencies mentioned earlier and other important items: HOA budget, HOA reserves, HOA meeting minutes covering the past 12 months, articles of incorporation and by laws.
Not as common, yet becoming very important in today’s atmosphere, is to determine if the HOA project, sometimes called a PD or PUD, is FHA approved (for FHA lending) or VA approved if you are considering a VA loan (veteran’s administration).