Every buyer asks the question, what is a “Contingency”. How do contingencies protect Home Buyers, when buying Real Estate in Los Angeles and surrounding areas? What are the contingencies that a Home Buyer will face during the first 21 days of being in escrow?
According to the Merriam Webster Dictionary, there are several adaptations of the meaning of “Contingencies”…….
“A provision for an unforeseen event or circumstance” or “Something liable to happen as an adjunct to or result of something else”.
Home Buyers in California are protected under provisions in the California Residential Purchase Contract (aka RPA). These contingencies/ provisions are built in to provide protection to Home buyers, based upon the need to investigate the Real Estate you are buying. What it means is that unless the buyer physically signs off on removing these contingencies, they have the chance to back out of the transaction based upon the non-approval of the listed items below and get their deposit back.
Following are the default contingencies protecting a Home buyer in the CA Residential Purchase Contract:
- Home Buyers Investigation, Due Diligence, Reports and Disclosures(total Default time is 21 day)
- Reports/Disclosures default time given 17 days.
- Common Interest (HOA) Disclosures default time 17 days.
- Home Buyer’s Investigation, including insurability Default time 17 days.
- Title: Preliminary Report default time 17 days.
- Sale of Buyer’s Property as mutual agreement.
- Appraisal Default time given 17 days.
- Loan Default time given 21 days.
Once the home buyer removes all the stipulated and protective contingencies (which you will at some point in time, between the 17th and 21st day from the date of ratification of your contract), your EMD (Earnest money deposit, which is usually 3% of the purchase price) is then applied towards the down payment and cannot be reversed to the buyer in case of a cancellation (some restrictions apply).
What Happens If a home buyer does not use these contingencies?
Yes, this can happen in All Cash transactions or transaction where the home buyer is buying a home directly from a for sale by owner. These contingencies are there for you to use and protect yourself. As a First Time Home Buyer Specialist (FTHBS) I cannot insist enough, how important it is for a home buyer to use these contingencies to their benefit. In a recent transaction that was being discussed at a party I attended, a buyer ditched their loyal agent to go with the listing agent. Why? Because the listing agent told these naive home buyers, that by going with them was the only way they would get the home. Guess what, the listing agent had the buyer make an offer of $49,000 over asking price and had the buyer remove their appraisal contingency. OMG!!! its pretty evident here that this unethical agent was only looking out for their best interest of double ending the commission! As a buyer, you should always have someone who looks out for your best interest only. I see so many buyers loose money in a transaction where they have been represented by listing agents and the best part is that these poor buyers never knew that they are being manipulated.
BONUS TIP: It is not in your best interest to have the Listing Agent represent you as a buyer in the same transaction. Would you ever hire the Attorney of the opposite party to represent you? This is why, as a successful Real Estate Listing Broker and a certified First Time Home Buyer Specialist (FTHBS), I have made it a practice, not to represent the buyer and the seller in the same transaction, because I feel it is a conflict of interest. Have you ever thought who pays the listing agent? Exactly! The only interest being served here is the Listing agent double ending the commission. Buyers Beware! if you don’t have good representation or in some cases none at all, you are risking it all.
Having said that Let’s break down the Buyers right to Reports and Disclosures.
1.Reports and Disclosures:
a) Seller Disclosures: The seller has 7 days per the contract (RPA) to give you disclosure on any issue, occurrence ( for e.g. a Death on the property) or a happening that may be detrimental to the property. California Association of Realtors provide forms like SPQ (seller Property Questionnaire), and TDS (Real Estate Transfer Disclosure Statement) to name a few that should be very important to a buyer. These disclosures have a standard list of questions regarding the property that the seller must answer to the best of his knowledge, and truthfully. If the seller does not deliver these reports to you within the time frames, a Home Buyer in Los Angeles shall have an additional 5 days before they remove their contingencies. It is imperative for a seller to deliver the reports to the buyer in a timely manner. (Also read my article Top 5 Seller mistakes that will cost you money)
b) Title Reports:
This extremely important document will give the buyer very detailed information. The title report will reveal various liens (Mortgages, Judgments, IRS liens, SBE liens, Mechanics Liens, to name a few), encroachments, easements, covenants, conditions, restrictions and anything else recorded against the property. The title company compiles the report from a search of county records in order to issue title insurance, and any liens against the property are listed as “exceptions” to title insurance. The buyer and their agents should review these very carefully. I have known of transactions where few days before the close of escrow a Judgement Lien was filed or a Mechanics lien was filed.
c) Natural Hazards Reports:
This report provides parcel-specific disclosures of official hazard zones that may affect future use of the property. The report also discloses any statutory natural hazard zones, property taxes and assessments, environmental contamination sites in the vicinity, and insurance claims history. Mello Roos is very common in the Santa Clarita Valley, CA and Orange County Ca. Mello Roos runs with property taxes and shows up as a line item on property tax reports under the term (CFD). Buyers know that if you are buying a home with Mello Roos, your property taxes are higher. You might still be paying HOA.
d) 9A Reports:
The “9A Report” is issued by the City of Los Angeles. City reports are also issued by Beverly Hills and Santa Monica and other cities, but not all cities. Only LA calls its report a “9A report”. The City Report provides the buyer with “confirmed” property information, such as the exact zoning and other important property matters including any Pending Special Assessments $ owed or owing to the city. For e.g. recently, in a transaction in which I was representing a buyer in Woodland Hills CA, the Listing agent was wanting to close without the 9A report. The seller was mad, and I kept calmly telling them that the buyer has the right to the report and we will not close without it. If the buyer closed the transaction without knowing this issue, it would have been a problem. The 9A report came in with the order of brush clearance. This would have been a headache for my buyer had they close without the 9A report. Did you know that many transactions close with the 9A report being delivered after the close of escrow? NEVER ALLOW YOUR AGENT TO LET YOU BUY / CLOSE THE PROPERTY WITHOUT PROVIDING YOU WITH A 9A REPORT.
e) HOA Documents report:
By buying property in a development, governed by CC&R’ s ( Covenants, Conditions and Restrictions) a home buyer agrees to be a member of the homeowners’ or condominium association, which manages the development. You agree to comply with the terms, conditions, and restrictions contained in a set of documents governing the use of the development (called the “governing documents”). This may govern everything from how much you’ll pay in assessments to whether you can rent out your condo, to what color you can paint the exterior, If you can make any modifications, Pet policies, Parking policies etc. With so much at stake, it’s a must, taking the time to actually read what’s in these documents before removing the contingencies.
Now that you have read through all the disclosures, documents and reports, another important component is to ensure that you can get insurance for the property you are buying. Your lender will require evidence of Insurability before they give you the money to buy this property.
The time frames of reports and disclosures are defaulted to 17 days in the purchase contract (aka RPA). In a competitive market like today, 10-12 days may be the choice for the time frame you may need to remove contingencies. In a hot Sellers Market to get your offer accepted by the seller, the time frame you choose may make or break your acceptance chances. The seller as well has to deliver all these reports to you in the stipulated time of 7 days per the RPA. There is always one or two reports that do not get delivered on time, namely the HOA documents and the 9A report. Keep that in mind.
2. Home Inspections:
Home inspection contingency is probably the most important of the four major contingencies. Here is an opportunity for the buyers to ensure that there are no major defects in the home that could cause an effect on the purchase price. Most buyers either overlook the importance of this contingency and some make it a bargaining chip to the point where the transaction becomes ugly. It is SO important that you focus on just those issues that are substantial. These usually are the areas of plumbing, heating and air, electrical, structural issues, extreme health or safety issues, and roofing. In many years of being a Top Agent, I have always advised my buyers that this is your opportunity to discover anything substantial, and NOT the opportunity to have the seller do a remodel or renovation to the home. This is also not a place to have your cousin Vinny the contractor/handyman come look at some stuff and be the one making or breaking this deal for you. The right thing to do is to hire a Licensed Home Inspector certified to do home inspections. In today’s hot seller market most negotiations of the time frame for this contingency are set at 10 days. The Residential Purchase contract give you 17 days, however, 10 days are usually the said practice prevalent. Don’t over look the fact that as a buyer you can do almost 18 different inspections which include but are not limited to Sewer Inspections, Termite Inspections, Pool and Spa inspections, Foundation inspection, Electrical Inspections, Chimney inspection, Geological inspection and septic inspections to mention a few.
Bonus Tip : Most Short Sales or Fixer Upper sales will be sold “AS IS” where it will be negotiated upfront that the seller will not make any repairs, so spend wisely. Did you know that the Residential Purchase contract is written as an “AS IS” buy, where the buyer has the right to do inspections and ask the seller for repairs? Know that the seller is under no obligation to even respond to your requests. At that point of time, if you are not satisfied, you must ask for cancellation right away and request the deposit back as allowed by the contract.
An appraisal is a written estimate of a property’s market value completed by an appraiser, required by your lender. The value is based upon a market analysis of recent sales prices for similar properties in the area, and the property’s physical condition. The appraisal is performed by an appraiser, an objective third party whose job is to give their professional opinion of the market value of a home. An appraisal is the appraiser’s opinion of the property’s value based on their knowledge and evaluation of the property. This opinion or estimate is developed using the three standard approaches to property valuation:
The Comparison Approach looks at properties of similar size, quality and location that have recently sold in order to derive a comparative value. Variations between the properties are factored into the valuation by adding or subtracting amounts to adjust for things like more bathrooms, a smaller lot. Cost Approach and Income Approach to name the other two.
This is an important step to make sure, yet again, that the price you are paying is acceptable as a fair and reasonable value in the eyes of a 3rd party which is your appraiser, based upon which your lender will loan you the money to close. The default time in the RPA is 17 days but most real estate transactions under conventional loans close with the mutually agreed time of 10-12 days as a contingency time frame for appraisal. Be aware that if you have an FHA loan you may require more than the norm of 10-12 days.
4. Loan Contingency:
The final most important of them all, without which you cannot buy the home unless you are paying all cash. This is what I call “Butterflies in the tummy” time. Your lender has received the appraisal, looked at the TDS, confirmed your insurability and is now set to re-check and re-confirm everything you said on the loan application to ensure you are still a good lend. This usually occurs between the 14th day and the 21st day into the contractual timeline.
During this time, your lender may ask for additional and updated documents like: Latest Pay stubs, Latest Bank Statements, Latest Income statements, Verification of employment, re checking that credit card balances, Gift letters, 401k statements, IRA or investment statements, confirming the sale of your existing home if there is one, and much much more. But Wait! “Didn’t I provide all this when I obtained a pre-approval”? Correct! you did, however, that is why it is called a “PRE” approval. The lender is ensuring, that what you wrote on the loan application, documents you previously provided and your credit worthiness is the same now, as at the time of the start of this process. Once you receive the FINAL APPROVAL…… It’s time to go to loan documents and closing, where you will meet a Notary, who will have you sign your promissory note aka Loan Documents.
5. Sale of buyers Property Contingency:
This contingency protects the buyer, in case their current home which they are selling so they can use those proceeds to buy this home, does not sell or falls through. In case their property does not sell, they can then back out of the sale of this home, because they put the sale contingency of their home. In a crazy sellers’ market like today a lot of buyers selling their home, choose not to put this home contingency in. Instead, they negotiate with the buyers of their current home of a rent back, to buy more time. ( Also read my article on how to sell a home and buy another at the same time in a hot sellers market).
Phew!!!! Final Word
Now that you have removed all your contingencies, your Earnest Deposit money that you put in escrow at the start of escrow is now nonrefundable, in case you ran into the neighbor’s mother in law ( ha ha) when you drove by it and want to cancel. This is why, you get all this time and contingencies to check off. Yes! Great Real Estate agents do earn every bit of their commission. The good ones guide you through this maze of paperwork and contingencies without any surety of getting paid. When you find great representation, Love, respect and be loyal to that great agent. BUT, Great agents are far few and between. Our industry is riddled with unethical, under educated and commission driven agents. Our industry has changed from being Client centric to being Agent centric. In one of my blogs I have discussed in details about how manipulative and under performing the Real Estate Industry has become and how it costs the consumer valuable time, money and emotions. ( see my article on how to find a great agent, Insider Tips and Tricks)
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Pebble Singha is a proud member of BrokerInTrust Real Estate, an Elite All Broker Network and Consumer Advocacy group. My blogs are a way to educate the consumers on what actually goes on in the Real Estate world vs what they think they know. This is one passionate Real Estate Brokers opinion on how he sees the Real Estate World in Los Angeles.
Disclaimer: Pebble Singha is not an Attorney or a Financial advisor. These are independent views and opinions of Pebble Singha and how he sees life in Real Estate. This blog is not to discredit or devalue anyone or their name. Information deemed reliable but not guaranteed. Cal Bre Lic # 01458748