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What are Real Estate Contingencies in California?

Buyers often ask, “What are real estate contingencies in California?”. This blog post provides the answer.

Let’s begin with a definition of real estate contingency.

 

What are Real Estate Contingencies in California?

According to the Oxford English Dictionary, the formal definition of a contingency is “A future event or circumstance which is possible but cannot be predicted with certainty.”

In other words, “an offer contingent on an event not happening due to unforeseen event or circumstance”.

A real estate contingency in California lets a buyer get out of (cancel) a purchase agreement when a certain event happens. The California Association of REALTORS® (CAR) explains that their standard real estate purchase agreements all contain the following contingencies:

  • Appraisal – Protects the buyer if the home appraisal comes out less than the purchase price allowing the buyer to cancel the purchase;
  • Disclosures – California law requires the home seller to make certain disclosures included in a “Transfer Disclosure Statement” (TDS) covering structural information, damages, neighborhood noise problems, and natural hazards like fire and floods risks;
  • Inspection – Mortgage lenders require a home inspection. If the inspection reveals termites or material defects in the house the buyer can cancel the purchase;
  • Loan – The buyer must get a loan (mortgage) approval to buy the house. If the buyer fails to qualify for the mortgage, the seller can cancel the sale; and
  • Title – The seller guarantees “clear title” as the owner with the right to sell the house. If “title defects” appear during the search of title records, the buyer can cancel the purchase.

 

Contingency to Sell a Buyer’s California Home

It’s always better to sell your home before making an offer to buy another home. That’s because your finances are in order with enough funds for your earnest money deposit and down payment.

Yet, circumstances arise when you find your dream home and don’t want to lose it. That’s why a contingency to sell your home before buying a house exists. If your house doesn’t sell in time for the closing date on your new home the seller can cancel the purchase.

Why would a seller agree to wait for the buyer’s home sale to close? A fix-up requiring large renovation expenses may not attract buyers. A buyer’s house in escrow with loan approval near closing may not take too long making the buy before selling contingency acceptable.

CAR has Form COP for this contingency.

However, if the buyer’s home is not in escrow or even listed, sellers beware as the risks outweigh the benefits. It amounts to letting a buyer tie up the house while the seller loses opportunities to sell.

One way around this is for the seller to add a new contingency called a Removal of Buyer’s Sale Contingency. If the seller gets an acceptable offer from another buyer can give written notice to remove the contingency within 72 hours. This forces the buyer to buy the house without waiting for the sale of his or her home. The buyer may seek a bridge loan or sell assets to come up with the funds to complete the purchase.

 

Do Contingencies Expire after 17 or 21 Days in California?

 

The answer is “yes and no” because after 17 days (for appraisal and inspections) or 21 days (loans) some contingencies are not automatically waived.

For instance, a loan contingency lets the seller deliver a Notice to Buyer to Perform (NBP) after 21 days if the buyer did not secure a mortgage. The NBP gives the buyer two more days to remove the contingency. The buyer accomplishes this by obtaining a mortgage or pays for the home with cash. After two days, if the buyer fails to fulfill the contingency the seller can cancel the purchase.

View a sample of the NBP.

 

Can Buyers Cancel Open Contingencies in California?

 

No, because each contingency has its cancellation rights. For example, an appraisal contingency allows the buyer to cancel if the property’s appraisal is less than the purchase price. Another example, a loan contingency gives the buyer the right to cancel if unable to qualify for the designated loan.

Similarly, according to CAR, “An investigation contingency allows the buyer the right to cancel the purchase if in ‘good faith’ the buyer is not satisfied with the property’s condition or anything else affecting the property’s condition”.

 

Will California Buyers Lose the Deposit after Canceling the Purchase based on an Open Contingency?

 

No, because an open contingency allows buyers to cancel the purchase at any time. The seller can’t sue the buyer for breach of contract since the buyer maintained the right to cancel. A breach requires the buyer to disregard conditions without good cause.

CAR advises their member Realtors never to give buyers assurances they will get their deposit back. That’s because if a seller simply refuses to give the deposit back it will force the buyer to file a lawsuit or demand arbitration. The buyer can sue the agent and the broker for making false assurances.

 

Can the California Seller Keep the Deposit after Canceling the Sale after an NBP?

 

No, because CAR’s contracts require a seller to cancel a contract after the NBP and to release the deposit to the buyer.

The only time a seller retains the deposit is when the buyer breaches the contract by failing to close (escrow) after the buyer removed all contingencies. This requires the seller to deliver a Demand to Close Escrow (Form DCE), not an NBP.

 

Can a California Buyer Waive Contingencies?

Yes, but consider the consequences.

With the popularity of pre-approved mortgages, most home purchases close without buyers backing out because of a contingency.

Buyer’s contingencies protect them from losing their earnest money deposit.

But, in a “hot” competitive real estate market many buyers voluntarily waive contingencies to make their offer more attractive to sellers. Yet, waiving contingencies meant to protect buyers’ earnest money deposits could lead to unforeseen events and losing the deposit.

Always consult with your lender and an experienced Realtor before waiving any contingencies.

 

Conclusion

 

Our answer to the question, “What are real estate contingencies in California?” raised issues about different types of contingencies.

  • Appraisal – An appraisal contingency protects buyers when the house appraises less than the sales price. The buyer cancels the contract and gets the earnest money back. If the property appraises at a higher value the seller can’t cancel the sale. Thus, the contingency protects the buyer both ways;
  • Disclosures – The law requires sellers to truthfully disclose many features of the home and its surroundings. Failure to disclose or writing lies allows the buyer to cancel;
  • Inspection – After receiving the home inspection report the buyer can cancel the purchase due to pests and material defects;
  • Loan – If the buyer can’t qualify for the loan the purchase can’t close and the buyer gets the earnest money back;
  • Title – If the title search discovers title defects that prevent the seller from selling the buyer can cancel the purchase;
  • Sell a Buyer’s Home – If a sale depends on the buyer first selling his or her home before the closing date failure to complete the sale on time allows the seller to cancel the sale. Sellers could request adding a Removal of Buyer’s Sale Contingency allowing the seller to sell to another buyer;
  • Expired Contingencies – Typical contingencies expire in 17 or 21 days when the seller can serve a Notice to Buyer to Perform giving the buyer two days to perform or the seller can cancel the sale;
  • Canceling Open Contingencies – Each contingency has its cancellation process; and
  • Waiving Contingencies – Buyers can waive contingencies protecting their rights, but not the ones protecting sellers.

 

Want to Learn More About California Real Estate Contingencies?

 

SoCal Lifestyle Realty helps sellers and buyers in the greater San Diego area. Our Realtors also can help you to understand California real estate contingencies.

Contact us for all your real estate sale or purchase needs in San Diego County.

 

Steven Rich, MBA – Guest Blogger

 

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