© 2013 Rockwell Publishing Washington Real Estate Practices Lesson 8: Contingent Transactions.
Post on 28-Mar-2015
213 Views
Preview:
Transcript
© 2013 Rockwell Publishing
Washington Real Estate Practices
Lesson 8:
Contingent Transactions
© 2013 Rockwell Publishing
Introduction
Real estate transaction typically conditioned on occurrence of one or more specified events.
Condition = contingency; found in contingency clause in purchase agreement. Usually benefits only one party.
© 2013 Rockwell Publishing
How Contingencies Work
Contingency clause makes purchase agreement conditional.Agreement is binding only if specified
event occurs.
© 2013 Rockwell Publishing
How Contingencies WorkTermination
If event doesn’t occur, party benefiting from contingency may terminate agreement and earnest money deposit is refunded to buyer.Benefiting party may instead decide to
remove contingency and proceed with sale.
© 2013 Rockwell Publishing
How Contingencies WorkRemoval
Only party benefiting from contingency can remove it. Sometimes contingency benefits both
parties, in which case it can only be removed with both parties’ consent.
© 2013 Rockwell Publishing
How Contingencies WorkBenefit buyer
Contingencies usually benefit buyer.Buyer doesn’t want to be obligated to buy
property unless it turns out to be what she thinks it is, and unless she can obtain funds to buy it.
© 2013 Rockwell Publishing
How Contingencies WorkGood faith effort
Every contingency has implied legal obligation to make reasonable, good faith effort to fulfill condition.If responsible party (usually buyer)
doesn’t make good faith effort, condition is essentially dropped and party is bound by contract.
© 2013 Rockwell Publishing
How Contingencies WorkElements of contingency clause
Four elements of contingency clause:condition and how it can be methow other party is notified condition is
met or removeddeadline by which condition must be met
or removedparties’ rights if condition is not met or
removed by deadline
SummaryHow Contingencies Work
ContingencyRemovalGood faith effortContingency clause elements
© 2013 Rockwell Publishing
© 2013 Rockwell Publishing
Types of Contingencies
Most common contingencies in residential purchase agreements:financing contingenciesinspection contingenciescontingencies concerning sale of another
property
© 2013 Rockwell Publishing
Financing Contingencies
Most residential sales contingent on buyer obtaining financing.
© 2013 Rockwell Publishing
Financing ContingenciesGeneral or specific
Financing contingency may be written in broad terms or may be specific.
© 2013 Rockwell Publishing
Financing ContingenciesGeneral or specific
Buyers prefer detailed financing contingency, so they’re only obligated to buy if loan obtained on favorable terms.But seller isn’t likely to agree to
contingency that is hard for buyer to fulfill.
Sellers prefer contingency that calls for typical loan on current market terms.
© 2013 Rockwell Publishing
Financing ContingenciesContingency terms
NWMLS purchase and sale agreement financing addendum often used in Washington to spell out financing contingency.Buyer indicates whether she is seeking
conventional, VA, FHA, or RD financing and states the amount of the downpayment.
Buyer required to apply for loan to pay off balance of purchase price.
© 2013 Rockwell Publishing
Financing ContingenciesFinancing timeline
Buyer must apply for loan within certain number of days.Provision may set deadline for when
buyer must notify seller that contingency is waived or provide seller with loan commitment letter.
© 2013 Rockwell Publishing
Financing ContingenciesFinancing timeline
If buyer fails to provide seller with loan commitment letter by deadline, seller can terminate agreement.Seller must provide notice of termination
so buyer has final chance to waive contingency.
© 2013 Rockwell Publishing
Financing ContingenciesEarnest money deposit
If buyer can’t obtain financing and doesn’t want to remove contingency, she must cancel purchase agreement. Earnest money deposit will be refunded
to buyer.
© 2013 Rockwell Publishing
Financing ContingenciesAppraisal
When buyer applies for loan, lender will have property appraised. Lender typically unwilling to make loan
unless appraisal shows property is worth at least as much as sale price.
Lender also usually requires inspection.
© 2013 Rockwell Publishing
Financing ContingenciesAppraisal
Purchase can be made contingent on appraised value of property being equal to or greater than sales price.If property is appraised below sales
price, buyer can cancel agreement, even if lender is willing to make loan.
© 2013 Rockwell Publishing
Financing ContingenciesAppraisal
If there is a low appraisal in an FHA or RD transaction, buyer can’t be required to go through with the purchase.FHA and RD programs require any
reappraisal to be made by same appraiser who submitted low appraisal.
SummaryFinancing Contingencies
Contingency termsFinancing contingencyAppraisal contingency
© 2013 Rockwell Publishing
© 2013 Rockwell Publishing
Types of ContingenciesInspection contingencies
Buyers may make offers contingent on satisfactory structural, geological, and environmental hazard inspections.
© 2013 Rockwell Publishing
Inspection ContingenciesElements
Four elements of inspection contingency:
1. who will order and pay for inspection
2. when and how buyer will give seller notice of disapproval of inspection report
3. seller’s option to perform repairs
4. time limit for reinspection by buyer if seller makes repair
© 2013 Rockwell Publishing
Inspection ContingenciesDeadline to complete inspections
Buyer has deadline to complete inspections and take action. If deadline passes and buyer hasn’t
notified seller that he disapproves inspection results, buyer is deemed to have approved results.
© 2013 Rockwell Publishing
Inspection ContingenciesApproval vs. disapproval
If buyer disapproves results, seller may be given opportunity to repair problems. Whether seller has this opportunity
depends on terms of inspection contingency.
If seller does have this option, she must notify buyer by deadline whether she intends to make repairs.
© 2013 Rockwell Publishing
Inspection ContingenciesOpportunity to repair
If seller chooses to make repairs, repairs are subject to reinspection and approval.
If seller chooses not to make repairs, buyer can either waive contingency and proceed or terminate transaction.
© 2013 Rockwell Publishing
Inspection ContingenciesOpportunity to repair
Other options: seller and buyer can negotiate partial repairs, a lower sales price, or other modifications to agreement.
© 2013 Rockwell Publishing
Inspection ContingenciesCode violations
Public authorities may order correction of any building code violations, regardless of whether transaction proceeds.
© 2013 Rockwell Publishing
Inspection Contingencies“As is” sales
If buyer decides to purchase property “as is,” NWMLS addenda forms have waiver provisions. Buyer acknowledges his decision to
waive inspection options based on his own inspection of the property.
SummaryInspection Contingencies
Inspection contingencyElementsRepairs
© 2013 Rockwell Publishing
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency
If buyers haven’t already sold current home when they find new home to buy, they will make offer contingent on sale of current home.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Can’t afford both homes
Most buyers must sell current home for new home’s downpayment, and few buyers can afford mortgage payments on both homes. Buyers don’t want to be obligated to buy
new home unless current home sells.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency
Hidden contingenciesPurchase and sale agreement terms may contain “hidden contingency” for sale of buyer's home. Agreement may be effectively contingent
on sale of buyer’s home, although contingency not actually stated in agreement.
© 2013 Rockwell Publishing
Example: Buyer can’t obtain loan without selling current home to raise cash for downpayment.
Sale is contingent on sale of buyer’s current home, even though contingency is not stated in purchase agreement.
Sale of Buyer’s Home Contingency
Hidden contingencies
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency When fulfilled
Contingency should address issues that exist with any contingency:how contingency fulfilled, relevant deadlines,method of notifying parties, andwhat happens if party fulfills or waives
contingency.
Also must say what happens if seller gets another offer during contingency period.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency When fulfilled
Contingency may be set up so it’s fulfilled when:buyer accepts offer on current home, orsale of buyer’s current home actually
closes.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency When fulfilled
Seller usually wants contingency fulfilled when buyer accepts offer on current home.But buyer usually wants contingency
fulfilled when sale actually closes.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Forms
NWMLS Buyer’s Sale of Property addendum states contingency is fulfilled if buyer accepts offer on her house. On the other hand, if buyer’s sale fails to close through no fault of buyer, she gets earnest money back.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Deadlines
Parties must agree on date that will give buyer a reasonable length of time to market property without delaying resolution of present transaction.
If buyer fails to sell home by this date, either party may cancel agreement. Earnest money deposit is returned to
buyer.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Deadlines
Dates in contingency clause must agree with other dates in purchase and sale agreement. For example, contingency clause should
not give buyer 95 days to sell home if current sale is scheduled to close within 90 days.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Bump clause
When purchase agreement is contingent on sale of buyer’s home, it’s common to include provision giving seller right to keep house on market and accept another offer. This provision, known as a “bump
clause,” may be used with other types of contingencies as well.
© 2013 Rockwell Publishing
Sale of Buyer’s Home Contingency Bump clause
Bump clause: permits seller to continue to market property for sale. Seller must notify buyer if seller
accepts a second offer (as backup).
© 2013 Rockwell Publishing
Bump ClauseBump notice
Bump notice: states that seller has accepted another offer as backup and gives first buyer period of time to satisfy or waive contingency. Also states if first buyer does neither,
her agreement will terminate and she will receive refund of earnest money deposit.
© 2013 Rockwell Publishing
Bump ClauseBump notice
Once buyer receives seller's notice, she has period of time to remove or satisfy contingency. If buyer removes contingency,
agreement remains effective. If buyer doesn’t remove contingency,
seller can cancel the agreement immediately.
© 2013 Rockwell Publishing
Bump ClauseSecond buyer’s addendum
Seller may require second buyer to waive any contingencies. Protects seller from losing both
buyers.
© 2013 Rockwell Publishing
Bump ClauseSecond buyer’s addendum
Addendum states property is subject to first purchase agreement, which is contingent on buyer selling her current home.
Before seller sends first buyer a bump notice, second buyer must waive all checked contingencies.
© 2013 Rockwell Publishing
Bump ClauseSecond buyer’s addendum
If seller receives second buyer’s waiver, seller sends first buyer a bump notice. If first buyer fulfills or waives the
contingency, second agreement terminates.
If first buyer doesn’t fulfill/waive the contingency, first agreement terminates.
© 2013 Rockwell Publishing
Rescission
When purchase agreement is terminated, have parties sign rescission agreement.Officially terminates purchase agreement
and any escrow.
© 2013 Rockwell Publishing
Rescission
If rescission agreement not used, rights or obligations from terminated sale might cause problems for subsequent sale.Rescission agreement usually authorizes
holder of earnest money to disburse it to appropriate party.
© 2013 Rockwell Publishing
Rescission
If parties disagree over ownership of earnest money deposit, designated broker holding deposit must send parties notice stating how funds will be distributed.Designated broker must then distribute
funds within 30 days of sending notice.
SummarySale of Buyer’s Home Contingency
Sale of buyer’s home contingencyElements of contingencyBump clauseRescission
© 2013 Rockwell Publishing
top related