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Thursday, September 10, 2009

Confused by Contingencies

Contingencies: 'Small c' or 'Capital C?'

One of the most confusing things about residential real estate -- and there are plenty -- is exactly what it means for an offer to be "contingent."

As Realtors use the term, a "Contingent" offer is one that's contingent upon the would-be Buyer selling their current home, which is what Realtors call "the backup home."

So when is a Contingent offer no longer contingent?

It's not what you might guess, i.e., when the Seller's home has closed and the Seller has been paid.

Rather, by convention, it's much earlier -- namely, when the Buyer's Inspection Contingency has been removed.

Even though a deal at that point is still far from done -- the Buyer's financing is still tentative, the appraisal hasn't been done, etc. -- the presumption is that the odds are good.

"Small c" Contingencies

Adding to the confusion associated with Contingent offers is all the other contingencies (with a small "c") than can be built into an offer.

In theory, a Purchase Agreement can be made contingent on any event happening (or not).

If the Buyer and Seller wanted to make the Purchase Agreement contingent on the Seller leaving a bottle of champagne in the fridge for them, they could (and at the right price, I'd recommend my Seller do it!).

It's also the case that, from the Lender's perspective, there are always contingencies right up until the time the closing documents are signed.

Like, the Buyer keeps their job, hasn't wrecked their credit (say, by filing for bankruptcy), etc.

In practice, the two big contingencies are the ones involving the Buyer's inspection and financing.

The key to keeping contingencies straight is distinguishing between Contingent and Non-Contingent offers on the one hand, and offers that are subject to various contingencies -- at least other than the Buyer selling their current home -- on the other.

For advanced beginners: how the contingency in Contingent offers is removed.

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