by: Martin Santiago, Broker-Associate
BUYING a home is a big deal. Too often, I think people rush into home ownership because it’s seen as a sign of adulthood and financial responsibility.
Home ownership can be a smart long-term move, but you want to know what you’re getting into. It is important to know the three contingencies you can select when buying a home. Contingencies are listed in the purchase agreement — a legally binding contract between buyer and seller that lays out a timeline and expectation framework for the property sale.
First is the inspection contingency on Section 14.B on the California Purchase Agreement. It means a homebuyer can cancel the sale or try to negotiate repairs based on the results of the inspection. In the Bay Area, most often, home inspections are conducted before putting the house on the market, thus a complete disclosure package is provided by the seller. The default in a California contract is 17 days for a buyer to complete the property inspections but this can be revised to a lesser number to suggest a stronger offer.
Second is the appraisal contingency on Section 3.I of the California Purchase Agreement. Typically, your bank will hire a licensed appraiser to determine the fair market value of the home based on its general condition, location and the sales price of similar properties in the area known as comparative sales, or comps.
Let’s say you’re buying a house for $1,300,000 with a $300,000 down payment and a $1,000,000 mortgage. If the house is appraised at $1,260,000, the bank will only loan you that amount — leaving you $40,000 short. If the seller refuses to lower the price to make up the difference, the appraisal contingency lets you walk away and get your deposit back. If you don’t have an appraisal contingency, you can pay the $40,000 difference out of pocket between the purchase price and the appraised value.
Third is the loan contingency on Section 3.J.3 of the California Purchase Agreement. Only home buyers who are obtaining financing tend to make the purchase contract contingent on obtaining a loan. Cash buyers do not request a loan contingency because there is no loan. Most sellers expect that a buyer will need to obtain financing. Sellers are typically somewhat reasonable and will allow a certain period of time to pass for the buyer to obtain the financing and remove the loan contingency. Default in contract is 21 days but in the Bay Area, this is usually reduced to 10 days or sometimes even 7 days to make a stronger offer.
A buyer might wonder what would happen if the lender, for some unforeseen or odd reason, decided to reject the loan. If the buyer had removed the loan contingency, the buyer might be at the seller’s mercy, and the buyer’s earnest money deposit could be at risk. Few buyers are willing to take a gamble on losing the deposit.
Removing all 3 contingencies means the buyer is proceeding with the purchase of the property without any reason to back out, negotiate or cancel the contract.
The shorter the contingency period, the better for the seller because the sale has the opportunity to move forward more quickly. Conversely, the longer the contingency period, the better for the buyer because they have more time to make sure the house they’re interested in is the one.
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Martin Santiago is a broker associate at Compass Burlingame, a full-service residential brokerage firm. The information presented in this article is for general information only and is not, nor intended to be a formal legal advice nor the formation of a broker-client relationship. Call or email Martin at (415)850-7704; [email protected]; www.teammsquare.com.
