© 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 Work Termination If event doesnt 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 Work Removal 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 Work Benefit buyer Contingencies usually benefit buyer. Buyer doesnt 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 Work Good faith effort Every contingency has implied legal obligation to make reasonable, good faith effort to fulfill condition. If responsible party (usually buyer) doesnt make good faith effort, condition is essentially dropped and party is bound by contract.

© 2013 Rockwell Publishing How Contingencies Work Elements of contingency clause Four elements of contingency clause: condition and how it can be met how other party is notified condition is met or removed deadline by which condition must be met or removed parties rights if condition is not met or removed by deadline

Summary How Contingencies Work Contingency Removal Good faith effort Contingency clause elements © 2013 Rockwell Publishing

Types of Contingencies Most common contingencies in residential purchase agreements: financing contingencies inspection contingencies contingencies concerning sale of another property

© 2013 Rockwell Publishing Financing Contingencies Most residential sales contingent on buyer obtaining financing.

© 2013 Rockwell Publishing Financing Contingencies General or specific Financing contingency may be written in broad terms or may be specific.

© 2013 Rockwell Publishing Financing Contingencies General or specific Buyers prefer detailed financing contingency, so theyre only obligated to buy if loan obtained on favorable terms. But seller isnt 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 Contingencies Contingency 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 Contingencies Financing 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 Contingencies Financing 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 Contingencies Earnest money deposit If buyer cant obtain financing and doesnt want to remove contingency, she must cancel purchase agreement. Earnest money deposit will be refunded to buyer.

© 2013 Rockwell Publishing Financing Contingencies Appraisal 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 Contingencies Appraisal 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 Contingencies Appraisal If there is a low appraisal in an FHA or RD transaction, buyer cant 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.

Summary Financing Contingencies Contingency terms Financing contingency Appraisal contingency © 2013 Rockwell Publishing

Types of Contingencies Inspection contingencies Buyers may make offers contingent on satisfactory structural, geological, and environmental hazard inspections.

© 2013 Rockwell Publishing Inspection Contingencies Elements 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. sellers option to perform repairs 4. time limit for reinspection by buyer if seller makes repair

© 2013 Rockwell Publishing Inspection Contingencies Deadline to complete inspections Buyer has deadline to complete inspections and take action. If deadline passes and buyer hasnt notified seller that he disapproves inspection results, buyer is deemed to have approved results.

© 2013 Rockwell Publishing Inspection Contingencies Approval 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 Contingencies Opportunity 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 Contingencies Opportunity to repair Other options: seller and buyer can negotiate partial repairs, a lower sales price, or other modifications to agreement.

© 2013 Rockwell Publishing Inspection Contingencies Code 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.

Summary Inspection Contingencies Inspection contingency Elements Repairs © 2013 Rockwell Publishing

Sale of Buyers Home Contingency If buyers havent 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 Buyers Home Contingency Cant afford both homes Most buyers must sell current home for new homes downpayment, and few buyers can afford mortgage payments on both homes. Buyers dont want to be obligated to buy new home unless current home sells.

© 2013 Rockwell Publishing Sale of Buyers Home Contingency Hidden contingencies Purchase and sale agreement terms may contain hidden contingency for sale of buyer's home. Agreement may be effectively contingent on sale of buyers home, although contingency not actually stated in agreement.

© 2013 Rockwell Publishing Example: Buyer cant obtain loan without selling current home to raise cash for downpayment. Sale is contingent on sale of buyers current home, even though contingency is not stated in purchase agreement. Sale of Buyers Home Contingency Hidden contingencies

© 2013 Rockwell Publishing Sale of Buyers Home Contingency When fulfilled Contingency should address issues that exist with any contingency: how contingency fulfilled, relevant deadlines, method of notifying parties, and what 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 Buyers Home Contingency When fulfilled Contingency may be set up so its fulfilled when: buyer accepts offer on current home, or sale of buyers current home actually closes.

© 2013 Rockwell Publishing Sale of Buyers 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 Buyers Home Contingency Forms NWMLS Buyers Sale of Property addendum states contingency is fulfilled if buyer accepts offer on her house. On the other hand, if buyers sale fails to close through no fault of buyer, she gets earnest money back.

© 2013 Rockwell Publishing Sale of Buyers 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 Buyers 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 Buyers Home Contingency Bump clause When purchase agreement is contingent on sale of buyers home, its 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 Buyers 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 Clause Bump 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 Clause Bump 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 doesnt remove contingency, seller can cancel the agreement immediately.

© 2013 Rockwell Publishing Bump Clause Second buyers addendum Seller may require second buyer to waive any contingencies. Protects seller from losing both buyers.

© 2013 Rockwell Publishing Bump Clause Second buyers 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 Clause Second buyers addendum If seller receives second buyers waiver, seller sends first buyer a bump notice. If first buyer fulfills or waives the contingency, second agreement terminates. If first buyer doesnt 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.

Summary Sale of Buyers Home Contingency Sale of buyers home contingency Elements of contingency Bump clause Rescission © 2013 Rockwell Publishing