© 2013 Rockwell Publishing Washington Real Estate Practices Lesson 8: Contingent Transactions.

© 2013 Rockwell Publishing

Washington Real Estate Practices

Lesson 8:

Contingent Transactions


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.


How Contingencies Work

Contingency clause makes purchase agreement conditional.Agreement is binding only if specified

event occurs.


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.


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.


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.


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.


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



Types of Contingencies

Most common contingencies in residential purchase agreements:financing contingenciesinspection contingenciescontingencies concerning sale of another

property


Financing Contingencies

Most residential sales contingent on buyer obtaining financing.


Financing ContingenciesGeneral or specific

Financing contingency may be written in broad terms or may be specific.


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.


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.


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.


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.


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.


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.



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.



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



Types of ContingenciesInspection contingencies

Buyers may make offers contingent on satisfactory structural, geological, and environmental hazard inspections.


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


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.


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.


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.


Inspection ContingenciesOpportunity to repair

Other options: seller and buyer can negotiate partial repairs, a lower sales price, or other modifications to agreement.


Inspection ContingenciesCode violations

Public authorities may order correction of any building code violations, regardless of whether transaction proceeds.


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



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.


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.



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.


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.


Hidden contingencies


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.



Contingency may be set up so it’s fulfilled when:buyer accepts offer on current home, orsale of buyer’s current home actually

closes.



Seller usually wants contingency fulfilled when buyer accepts offer on current home.But buyer usually wants contingency

fulfilled when sale actually closes.


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.


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.


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.


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.


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).


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.


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.


Bump ClauseSecond buyer’s addendum

Seller may require second buyer to waive any contingencies. Protects seller from losing both

buyers.



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.



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.


Rescission

When purchase agreement is terminated, have parties sign rescission agreement.Officially terminates purchase agreement

and any escrow.


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.


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


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© 2013 Rockwell Publishing Washington Real Estate Practices Lesson 8: Contingent Transactions.

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