A contract is one of the final steps in any real estate or property purchase, but some of the details can be confusing if you don’t know what to look for. Things like contingencies have certain terms and specific steps that real estate investors need to fully understand before closing a deal.
I received a question from a student the other day that presents a great opportunity to explore the topics of real estate contracts and contingencies.
Question: I signed a real estate contract to sell a property, the contract contained contingencies such as ten days to have an inspection and 30 days to obtain financing. When is the contract really binding?
Let’s first talk about how a contract is created. A real estate contract first and foremost must be in writing to be enforceable.
A property is put on the market and offers are accepted. Usually a real estate professional will submit a written offer to the listing agent. The listing agent will then “present” the offer or offers to the seller and the seller has three basic options:
- Accept the offer as presented
- Reject the offer all together
If there is a counteroffer, in a sense a whole new process starts. But now the buyer (recipient of the counter offer) has the same three options, accept, reject or counter back.
Once all parties have reached agreement, you now have a binding contact with the exception of the contingencies in place by the buyer. So now the seller is committed to having to sell but the buyer is not bound. This is called “conditions subsequent” by law. There are laws that state a contract can be declared void if certain conditions don’t come to fruition.
The most common contingencies in real estate contracts are:
Financing – Where the buyer can obtain a loan for the property (buyer and property must qualify)
HOA (Home Owner Association) review – a review of the by-laws and CCR’s (covenants, conditions and restrictions) of the complex
Sale or purchase of other property – If the seller or the buyer needs the proceeds from one property to purchase another.
Close date – typically 30-60 days – if one or both parties don’t do everything necessary, or don’t get the deal closed by the agreed on date.
Physical Inspection – The inspection of the subject property produces things that the buyer is unwilling to accept and the seller isn’t willing to remedy them.
Appraisal – The appraisal, typically done by the lender, doesn’t support the value the property is being sold at.
This is very general because as you know, different states have different laws. In some states, a contingency has to be formally removed (which means there is a document that must be signed removing the contingency). Whereas in other states if the date has passed and no action has been taken, the contingency is automatically removed. In some states, the seller (after the date has passed) can demand the buyer remove the contingency or they have the right to cancel the contract.
The time limits in the contract are firm unless both parties mutually agree to any extension.
This is one of the key reasons that for a novice investor or first time home buyer, it’s important to have a real estate professional to guide you through the contract process. As professional investors purchasing off market properties we have to be savvy to these issues.