Jan. 8, 2018
A real estate contract is a binding contract. Purchasing a home is also one, if not the, biggest purchases of your life. These two facts make it critically important to make sure you are protected when making an offer on a property. One of the best ways to protect your position is using the contract contingencies to your full advantage.
What is a Contingency
A contingency is defined as "a future event or circumstance that is possible but cannot be predicted with certainty". A real estate transaction is a process and events follow a systematic time table that builds from prior events. Depending on a particular outcome, the transaction can proceed in different directions. Managing this sequence of events keeps you on top of the transaction and avoids any missteps that could result in an unwanted circumstance.
The standard Purchase Contract from the Hawaii Association of Realtors is 14 pages in length. Compared to many other states, it is quite lengthy. But considering the importance of the purchase, it makes sense and was created to fully protect all parties. Standard contingencies for buyers include things such as providing proof of cash funds, obtaining financing, performing a home inspection and a final walk through prior to closing. There are also contingencies based on seller information and performance. For example, a seller must provide a full disclosure of the property. The buyer must then review it and accept or decline it. Failure to accept the disclosure can result in a cancellation of escrow. These types of contingencies are similar for surveys, homeowner association and other related documents, and pest inspections and title reports. The nature of the contingency allows for various outcomes - it can be approved, questioned or simply declined. If approved, the contingency is settled and the transaction moves on to the next step. If a contingency is questioned, there are typically timelines that allow for further information to be provided, reviewed and accepted or rejected. Declined can mean that either the contingency has not been met or is not acceptable. This can lead to further negotiations or simply can mean the termination of the contract.
While the standard contract covers many of the issues that commonly arise in a real estate purchase, there are many times when special circumstances require customized contingencies that are worked out between buyers and sellers. An example of this is when the buyer needs to sell an existing home before they can purchase. Conversely, a seller may want the sale contingent on them finding a replacement property. These scenarios are more common, but really most any item in a purchase contract is negotiable.
The most important thing about any contingency is to be realistic. There can be real consequences for failure to perform on a contingency item. Buyers can risk their deposit money. Both parties can risk losing the transaction entirely and not recouping any associated expenses or costs.Make sure that the contingency and the timeframe for the contingency are manageable. And, if you are asking for some consideration from the other party, be willing to give something back in return. The end goal for setting contingencies is to allow the purchase process to move more smoothly.