So you’re buying your first house. You’ve gotten preapproved for a mortgage, researched a plethora of neighborhoods and after months of touring dozens of houses you’ve finally found what you think is the ideal one.
Now the real nerve-racking phase begins: putting in an offer and negotiating with the sellers. The process can be particularly stressful in neighborhoods that are in high demand, where bidding wars are likely.
Here’s a primer on what you need to know about making an offer, the purchase agreement and contingencies:
When you make an offer on a property, you will be asked to include a “good faith” payment in order to show the seller that you are a serious buyer. When your offer is accepted, you will generally be required to increase your deposit — usually by several thousand dollars or by a percentage of the purchase price.
Your money will be held in an escrow account, then be credited toward the purchase price at the time of closing. If you change your mind and decide to not go through with the sale, you may be at risk of forfeiting your entire deposit unless you have some contingencies written into your contract.
A contingency is a condition written into a purchase agreement that specifically states that the contract is reliant upon certain events taking place, such as lender approval for a mortgage, your acceptance of a building inspection, delivery of marketable title or even building code compliance.
Often in a competitive situation, a real estate agent might advise you to forgo contingencies as a way of improving your chances of getting the house. But contingencies are vital to your closing because they eliminate any ambiguity over who will pay for what, and allow a legal way for one party to cancel the agreement.
Common Contingency Clauses…
Here are some of the most common contingencies:
• A financing contingency allows a specified amount of time for the buyer to obtain a loan commitment and acceptable financing terms. These can be as specific as a designated interest rate or loan term. If not approved exactly as stated, the buyer has the option to cancel.
• An inspection contingency, depending on your state law, can be written to include property inspections that cover possible structural problems or material defects. It can specify who will pay for necessary repairs, and to what extent each party is willing to pay for those repairs. This can also include termite damage; the presence of radon, lead or asbestos; and whether the property is in a flood or an earthquake zone.
• Attorney approval means the contract is subject to passing legal scrutiny. That can include an attorney review, title report or any other legal paperwork (such as condominium documents) that relate to the purchase.
• The sale is subject to the approval of a condominium or co-op board.
• The property is in compliance with building code. If you suspect recent remodeling or additions were done on the property, the purchase contract may be reliant on proof that the necessary building permits were obtained and building codes were enforced.
You may have special concerns that are not covered in the standard agreement. For example, if you have allergies, you may want to include a mold inspection, or if you need to make the home wheelchair compliant, you may want confirmation from a contractor for that possibility.
If you intend to renovate an older home, you may want to add a contingency clause to determine whether the house is listed as a landmarked building or restricted by the amount of changes that can be made. Make your contingency as specific as necessary to cover your concerns.
To increase your chances that the seller will accept your requests, you can offer to pay all cash, or have a preapproval commitment from a lender ready. Anything that will show your ability to ensure a speedy closing once the contingencies have been met will improve your chances of getting the sellers to accept your offer.
Once a contingency has been approved, both the buyer and seller should sign a document that moves the contingency from the purchase contract. (Keep in mind that if the contingency is not fulfilled exactly as written, you have the option to withhold your approval).
The agreement should be given to your closing agent and real estate representative. If the deadline for a contingency arrives, and both parties do not sign off on that contingency, this failure to act serves as acceptance of the contingency. For this reason, it is important to keep a record of the dates for removal of each contingency.