What are Contingency Provisions? Do I need them?


Contingency provisions
describe an event, activity or condition which needs to occur before the purchase agreement transaction can proceed toward closing. On the occurrence of the event or approval of information described in a contingency provision, the contingency has been satisfied and is no longer an obstacle to further performance and closing.

Contingency provisions authorize the buyer or seller to cancel the transaction when:

  • the described event fails to occur; or
  • the information received is disapproved.

Contingency provisions stating conditions allowing for the termination of an agreement are separated into two categories:

  • event-occurrence contingency provisions — those provisions satisfied by the existence, completion or outcome of an activity or event which eliminates the contingency; and
  • further-approval or personal-satisfaction contingency provisions — those provisions satisfied by the receipt, review and approval of data, documents and reports which eliminate the contingency.

Event-occurrence contingency provisions address the occurrence of specific activities and events, such as:

  • the sale or acquisition of other property by the buyer or the seller;
  • obtaining purchase-assist financing;
  • the approval of building permits; and
  • the elimination of title conditions, or the release of encumbrances, such as liens or leases.

Further-approval contingency provisions address the right of the buyer or seller to cancel the transaction on their disapproval due to unacceptable property conditions and
material facts, such as:

  • disclosures and inspection reports concerning the physical integrity and natural and environmental hazards of the property;
  • appraisals;
  • title reports; and
  • rental income and expenses.

To terminate a purchase agreement under a contingency provision, the buyer or seller needs to have a reasonable cause to cancel for the cancellation to be enforceable. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other person by notice of cancellation.

Contingency provisions contained in purchase agreements are eliminated by either:

  • satisfaction of the contingency provision by the occurrence of an event or by someone’s approval of the conditions contained in information, data, documents or a report; or
  • waiver or expiration of the contingency provision.

Contingency provisions are unique as they deal with uncertainties at the time an agreement is entered into. As a matter of good practice, contingency provisions are included in purchase agreements to eliminate any uncertainty about aspects the property’s title, income/expenses or physical condition. Before escrow is able to close, contingency provisions need to be eliminated.

Fixed Rate Vs. Adjustable Rate Mortgage Loans


A
fixed rate mortgage (FRM) provides the classic method for calculating interest that accrues on principal over the life of a mortgage. With an FRM, the interest rate and scheduled payments remain fixed for the life of the mortgage, giving certainty to future payment obligations.

The FRM is the most consumer-friendly and risk-free type of mortgage financing. While always available for homebuyers in need of a mortgage, FRM financing for business or investment properties typically has short due dates of three to seven years. 

An adjustable rate mortgage (ARM), as diametrically opposed to an FRM, calls for periodic adjustments to the interest rate. In turn, the amount of the scheduled payments fluctuates with each interest rate adjustment over the period remaining on the mortgage’s original amortization period. 

The unique feature defining all ARMs is an interest rate formula, typically comprised of:

    • An introductory interest rate applicable for a short period of several months, also known as a teaser rate or qualifying rate
    • An index figure, a proxy for future changes in the lender’s cost of funds
    • margin rate, which does not change during the life of the mortgage and is the earnings spread a lender adds to the index figure to determine the annual rate of interest charged on principal following each adjustment in the mortgage rate
  • An adjustment interval at the end of which the mortgage interest rate is changed to reflect a rise or fall in the index figure.

The ARM’s adjusted interest rate is determined by adding the index figure to the margin rate (at set intervals, and subject to any caps or floors as limitations beyond which the mortgage rate cannot change). 

ARMs become popular when property prices or FRM interest rates rise faster than the rise in personal incomes. ARMs allow you to leverage the lower initial interest rate charged on an ARM (compared to the FRM rate) into a higher mortgage amount to fund the purchase of a home. In turn, you are able to pay a higher price for a home, but take on the risk your payments will increase over the coming years.

 

How do I Use a Pest Control Report?


A
Structural Pest Control (SPC) report is not a legislatively mandated seller disclosure in a California real estate transaction, unlike a Transfer Disclosure Statement (TDS) or a Natural Hazard Disclosure (NHD). Most conventional lenders do not require a NSPC report or termite clearance.

However, the existence of pests such as termites adversely affects the value of property. Since this fact relates to value, the seller is compelled to disclose their presence before the buyer makes a decision setting the price and closing conditions in an offer submitted to the seller. 

To best disclose a pest infestation, the seller orders an SPC report. The report is included as part of the marketing package for delivery to prospective buyers or their agents when they inquire about the property — before the seller enters into a purchase agreement with the buyer. 

A Pest Control Certification — a certificate of clearance — is issued by the SPC company to indicate the property is free of infestation or infection in the visible and accessible areas. This certification is commonly called a termite clearance. If any infestation or infection is not corrected, it will be noted in the certification. The SPC report separates the findings and recommendations into two categories: 

1. Section I items, listing items with visible evidence of active infestations, infections or conditions that have resulted in or from infestation or infection; and 

2. Section II items, listing conditions deemed likely to lead to infestation or infection but where no visible evidence of infestation or infection was found. 

If a seller has obtained an SPC report which discloses the existence of conditions that have an adverse effect on value and does not inform the buyer of the contents of the report, the seller is defrauding the buyer. Therefore, the buyer may pursue the seller and the seller’s broker/agent to recover the cost of repairs, either prior to or after the close of escrow. Provisions in the purchase agreement allowing the seller to entirely avoid the cost of termite clearance and repairs are not enforceable when known defects go undisclosed at the time the buyer and seller enter into a purchase agreement.  

Further, when the seller does not provide an SPC report, the buyer needs to consider ordering their own SPC report.

How Do I Submit an Offer to Purchase a Home?


When you make an offer to purchase a home, your agent uses a purchase agreement form to enter the terms of your offer to buy the property you have selected.
 

To be valid, your offer needs to:

  • be in writing and signed by you as the buyer;
  • be definite and certain in detailing the terms for your purchase;
  • show your serious intent to enter into an agreement; and
  • be communicated to the seller who can accept the offer.

Your signing of the purchase agreement which your agent has properly filled out satisfies the first two conditions of terms and intent. To be definite and certain in its terms and conditions for enforcement, your offer needs to:

  • identify you as the buyer, and name the seller;
  • describe the real estate;
  • state your price and the form in which you will pay it; and
  • set the time for payment of the price — your full performance.

To be enforceable, the offer does not need to be on any particular form.

However, to be valid, the offer needs to be communicated to the seller for their acceptance.

To communicate your offer, your agent delivers your signed purchase agreement to the seller or the seller’s agent for their consideration.  

Neither the seller nor their agent has any legal duty to acknowledge or respond to your offer.

If the seller signs their acceptance of your offer intending to sell, their agent will deliver the signed purchase agreement to you or your agent.  

However, if the seller does not accept your offer, your agent needs to urge the seller’s agent to respond with a counteroffer or a formal rejection signed by the seller.

A rejection of your offer occurs when the seller:

  • does nothing and the time for acceptance runs;
  • returns a signed, written rejection stating no counteroffer will be forthcoming; or
  • prepares and submits a counteroffer, using either a counteroffer form or new purchase agreement form stating different terms.

Without first preparing and submitting a counteroffer, the seller may make an inquiry into your willingness to consider different terms. The inquiry for clarifications or changes is not a counteroffer or rejection of your written offer. Such an inquiry does not bar the seller from a later but timely acceptance to form a binding agreement.

However, when the seller attempts to accept your offer by first altering its terms in some way prior to signing the acceptance provision, the change in terms creates a counteroffer to perform on different terms. The written counter is a rejection which terminates your offer.

The seller’s agent has a duty owed to their seller to present every purchase offer they receive, regardless of the terms offered or the form used to present it. However, neither the seller nor their agent has any legal duty to respond to an offer. A failure to respond to an offer does not automatically mean your offer was not presented to the seller. Further, the offer need not be prepared on a form to be enforceable.

In fact, the back of a business card may be used to make an offer. However, provisions in boiler-plate purchase agreement forms state the essential terms and conditions of an offer needed to make it clear, complete and enforceable when accepted.

What happens when the buyer or seller breaches the purchase contract?


Remedies available to buyer when the seller a materially breaches a purchase agreement contract include:

  • abandoning the transaction by entering into a mutual cancellation of the purchase agreement and escrow instructions
  • acquiring the property by pursuing specific performance of the purchase agreement
  • pursuing the recovery of money, whether or not the buyer still wishes to acquire the property

For example, when the seller resells the property to another buyer at a higher price after accepting an offer from the original buyer, the original buyer may pursue specific performance and demand the seller adhere to the purchase agreement.

However, if the original buyer decides not to pursue specific performance, the seller is liable to the original buyer for the difference in price. A buyer’s money claims include:

  • general damages, money directly expended or the monetary value lost in the transaction
  • special damages, money collaterally lost due to the seller’s breach
  • prejudgment interest at the rate of 10% on all monies recovered.

A buyer is allowed to recover expenditures incurred prior to a seller’s breach to prepare a property so they can take possession, such as construction costs advanced by a buyer for upgrades and alterations. However, the purchase agreement by its provisions needs to reflect the intention of the buyer to incur these expenditures.

Conversely, a seller of real estate faced with a materially breaching buyer needs to promptly decide whether to:

  • enforce the purchase agreement;
  • remarket the property for sale; or
  • retain the property and postpone or entirely forego any resale effort.

A seller’s total recoverable losses when promptly remarketing and reselling the property include:

  • carrying costs of mortgage interest payments, taxes, insurance, maintenance and utilities incurred by the seller and interest on the seller’s net equity between the date of the breach and the date escrow closed on the resale less the property’s rental value when the seller remains in possession; and
  • any reduction in the seller’s net proceeds on the resale below the net proceeds the seller was to receive from the breaching buyer’s transaction due to:
    • the increased closing costs the seller additionally paid, such as the new buyer’s nonrecurring closing costs, financing fees on the resale and mortgage prepayment penalties; and
    • any decline in the property’s resale price.

When the seller takes the property off the market or is not diligent in their resale efforts, their recovery of money is limited to their out-of-pocket transactional expenses, property operating expenses incurred before the buyer’s breach, and any move out and move back relocation expenses to fulfill their performance under the purchase agreement.

When the seller remains in occupancy through the date of the breach, these costs are offset by the rental value of the property.

5 rules of engagement for requesting repairs from sellers

When buyers and sellers start going head-to-head, no one comes out a winner 

Key Takeaway:
It’s reasonable to ask for roof and termite clearances and that the home’s primary systems work. It’s not reasonable to ask for upgrades, abatement or cosmetic changes. 

Real estate sales and continually increasing prices have been on a six-year romp. With sellers firmly planted in the driver’s seat, a significant percent of homes have been sold “as-is” with little or no regard for repairs. When we begin seeing shifts in the market, requests for repairs will begin to reappear like spring flowers after a long winter freeze.  

Lets look at what is reasonable and unreasonable with regard to repair requests: 

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What is the Final Walk Through?


The
final walk-through of the property you are set to purchase is your last chance to confirm that all agreed-to repairs are complete and that nothing has materially changed since your home inspection.  

The final walk-through happens shortly before closing. It will likely take you and your agent an hour or less to complete. Also, be sure to bring a copy of your home inspection and final purchase agreement so you know which specific repairs to review.  

Here is a list of what to look for when doing the final walk-through:

  • Ensure agreed-to repairs have been made.
  • Check that all appliances and fixtures to be included in the home purchase are present.
  • Ensure no trash or unwanted items left by the seller are present.
  • Check for the presence of mold or standing water in all the rooms, including the bathrooms, the kitchen, near the water heater and the laundry room.
  • Test all of the home’s systems, including the heater, air conditioner, appliances, garage door and doorbell.
  • Check the outlets by bringing along your cellphone charger.
  • Walk around the exterior of the home to ensure the landscaping is intact and no exterior damage has occurred.

Finally, don’t hesitate to ask questions! I will be there at the final walk-through to provide answers and help you if issues arise.

What is a Buyers Agreement?


It’s good practice for the buyer and seller to each retain their own agent to act as their exclusive representative in a real estate transaction. In the context of a real estate sale, the buyer‘s and seller each separately employ a different licensed broker under a listing agreement. The listing agreement establishes that the broker will receive a fee in exchange for providing real estate services.

The broker employs licensed individuals as their agents. Their agents then solicit sellers and buyers to employ the services of their broker, and in turn the agent.

On entering into a listing agreement, the client retains and authorizes their broker and agents to diligently and continuously perform the agreed-to real estate services on behalf of the client. The broker’s agent works directly with the client, and in doing so, acts on behalf of the broker.

Regarding the broker fee, the seller of property typically pays the real estate fees due all the brokers. The fee is disbursed from the price paid by the buyer in the sales transaction. On each broker’s receipt of their fee on a sales transaction, the brokers share the fee with their agent(s) who participated in the transaction.

When the buyer’s broker receives their fee from the seller as agreed on the sale, the buyer obligation under their employment agreement to ensure their broker is paid is satisfied. Thus, the buyer does not owe their broker a fee.

Occasionally, the buyer’s broker structures their fee to be paid by the buyer as part of their total acquisition costs and purchase price. Here, the buyer directly pays their broker a fee as agreed in their employment agreement. The seller is paid their purchase price for conveyance of the property to the buyer and owes no fee to the buyer’s broker from the purchase price received.

Overview of What Agency Means For You.

Escrow: What to Expect at Your Signing

As you near the end of your transaction, and when Escrow has received and prepared the required documents, you will be contacted to set an appointment for you to review, approve and sign your documents. This portion of your transaction is referred to as “the signing” and will usually occur a few days prior to your actual close date.

This instructional video will prepare you for what to bring and what you can expect at your signing.

Closing Disclosure

The Closing Disclosure is also required to be given to you by the CFPB. While your lender is charged with providing this document, it may assign that responsibility to your escrow or title company. You’ll receive your Closing Disclosure at least three business days prior to your transaction closing.

What is Escrow?

Buying a home is an exciting event, but the process of completing that purchase can be complex. When you make an offer on a property and sign a sales agreement with the seller, the next step is to open an escrow account.This account keeps funds and paperwork in the care of a neutral third party – like an escrow or title company – until all the requirements of the sale have been met. Watch this video to learn more about the process, keeping in mind that many aspects of the escrow process vary depending on local customs.

 

To complete the purchase of your home, you’ll have a major role to play throughout the escrow process. Your escrow officer will be required to follow the closing instructions and meet the requirements outlined in the sales contract you and the seller previously signed. It’s important to direct any questions regarding the escrow process to your escrow officer, and any questions about your loan directly to your lender. Watch this video to learn more about closing your transaction. And congratulations on your new home!

What is Escrow Infographic