Contract Contingencies - What do they cover and who do they protect? Part 2

Use a Mammoth realtor or broker when making a decision to purchase in Mammoth Lakes. I happen to be one and want to share some of my experience and expertise with you.

Residential Real Estate Purchase Agreement and Joint Escrow Instructions
Buyer’s and Seller’s are asked to sign a Residential Purchase Agreement and Joint Escrow Instructions when making an offer to purchase real property.

Contract  Contingencies:  What do they cover and who do they protect?    Part 2

Typical contingencies for a buyer are:
1.  Loan 
2. Appraisal
3. Title
4. Physical inspection
5. HOA documents
6. Short sale advisory
7. Selling an existing property

Typical contingencies for a seller are:
1. Receiving from the buyer the preapproval letter. 
2. Receiving from the buyer verification of funds for either the down payment or the cash required to close the escrow.   
3. Finding replacement property 
4 . Cooperation from the buyer for a 1031 Tax Deferred exchange.

There are time frames involved in these various contingencies.  The number in the contract unless changed by the agent completing the documents is typically 7 days for proving ability to complete transaction, (preapproval letter and verification of funds) 17 days for the physical inspection and approval of HOA documents 17 days for the loan and appraisal.

In my last blog I covered the first 4 contingencies for a buyer and the first  2 contingencies for a seller.

Buyer Contingencies
5.  HOA Documents  This information typically comes through escrow.  The seller has to sign the HOA Request, which gives his permission to provide to the buyer all the documents associated with the running of the condo complex he is selling.  Typically, those documents are kept by a CPA.  There is a charge to the seller for providing this information to the buyer.  The packet is comprised of the C.C.&R.’s, Articles of Incorporation, By-Laws, Architectural guidelines.  It also includes Board minutes, which shows the discussions that the Board is having regarding maintenance, special projects, budget, reserves, etc.  Most projects have 1 to 2 Board meetings a year, which might include one where all the homeowners are invited to attend. Some of the projects will have an annual work party, so that the owners get to meet and do some maintenance items around the project, that save money, get the work done, and provide an opportunity to meet other owners.  These types of meetings are typically held in the summer months and often over a holiday weekend.  A projected budget as well as an actual budget is also provided to the buyer along with a reserve study.  The reserve study shows the anticipated maintenance to the project, when it will need to be completed and how much money is being set aside monthly to pay for this.   Things that are in the reserve study would include, roofing, siding, painting, landscape projects, new water lines, etc.  This is very helpful to a buyer to see if the monthly HOA’s are adequate or if they can anticipate a special assessment.  Special assessments always need to be voted on, where an increase in the monthly dues can be passed without a majority approval.

6. Short Sale Advisory  This is only used if the seller is upside down in the property, meaning he owes more than the market value.  The seller can accept an offer, but it isn’t binding until the bank accepts the price.  The Short Sale Advisory tells the buyer that the acceptance of this offer, is contingent up on bank accepting the purchase price.  The bank will be receiving less than the current pay-off balance on the note, so they must order their own BPO (appraisal) to be sure that they are selling the property at a reasonable price since they will be writing off the unpaid portion of the debt.  This Short Sale Advisory and also a Short Sale Addendum is a contingency for both buyer and seller.  If the bank doesn’t accept the offer, the seller is not obligated legally to sell the property for that price.  If the bank doesn’t accept the price, the buyer is not obligated to move forward.

7. Selling an Existing Property  Item 13 on the Residential Purchase Agreement indicates that the buyer is making an offer to purchase, but can only close the escrow when the existing property also closes escrow.  This is not an ideal contingency for a buyer to use in their offer as the seller doesn’t really know when the escrow will close.  Most sellers are looking for a clean offer without the added contingency of another property.

Seller Contingencies
3.  Finding Replacement Property
Some sellers will list their property because they have an idea of what they want to replace their current property with.   They know that if they make an offer to a buyer, without their property being in escrow, which is the scenario I just covered, they will most likely not get a favorable response.  So, they will list their property, contingent upon finding a replacement property.  This type of contingency means the buyer may have a delay in closing an escrow. If they are obtaining a loan, it means they may not be able to lock into a loan because lenders only give you so much time on an “interest rate lock”.  For a cash buyer, this delay is not as much of an issue, depending of course on the buyer’s need to close an escrow.

4.  Cooperation from the Buyer for 1031 Tax Deferred Exchange  This contingency does not really affect the buyer, unless the seller also requests additional time to find their exchange property.  This is for the benefit of the seller’s tax situation.  By executing a 1031 Tax Deferred Exchange, any gain avoids capital gains, until the seller takes the cash from the property.  By reinvesting the proceeds directly into another escrow through a third party accommodator, the seller avoids the capital gains tax.  This tells the IRS that the seller’s intent has always been to reinvest the proceeds, the buyer signs acknowledgement of this, but the buyer is not affected financially.

If you have any other questions on typical contract contingencies, please call me at 760 934-3078 or email me at

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