Purchase Agreement Contingencies

Buyers and sellers alike question what contingencies are on a purchase agreement.  A contingency is any condition that must occur before the purchase agreement becomes completely binding.  Essentially the first step (the contingency) must occur before the next step can happen.  Common contingencies include:

• The buyer's ability to get financing.
• A private home inspection arranged by the buyer.
• The sale of the buyer's house.
• Review of townhouse or condo association documents.
• Seller providing clear title.
• Well and/or septic inspections.

With any of the above contingencies, wording exists in the Minnesota Association of REALTORS approved forms to clearly define time limits and penalties if the contingencies are not met.  In the case of financing, the buyer's earnest money would be refunded to the buyer.  In the case of home inspection requests, if the seller chooses not to proceed with requested repairs, the seller can also cancel the purchase agreement and refund the buyer's earnest money.  Discovery of something disagreeable in association documents allows a buyer to cancel the purchase agreement and get their earnest money back.  Favorable well and/or septic inspections are required by some counties in order to close.  If the systems don't pass muster, the buyer again gets the earnest money back.  Clear title?  Without clear title, lenders will not fund the loan and once again the earnest money is refunded to the buyer. 

The most difficult contingency in today's market is the sale of the buyer's house.  Sellers are willing to accept an offer contingent on the sale of the buyer's house because they want a buyer, but the chances of the buyer's house selling is much slimmer than 5 years ago.  Again a time limit is spelled out in the purchase agreement and earnest money is refunded to the buyer in the event their house does not sell. 

Contingencies are protections many times for the buyer, but they are also like stepping stones to the closing.  One has to step from the first contingency to the next and then the next before the house can successfully close.

Comments

[Bonnie Erickson]

Sharon, Welcome to my blog. The inspection contingency addendum says "if within (X)(number filled in by the buyer's agent) business days after such notice (to correct something from the inspection) Buyer and Seller have not agreed in writing to a remedy of the identified issues, this Purchase Agreement is canceled without further notice required. Buyer and Seller shall immediately sign a Cancellation of Purchase Agreement confirming saidcancellation and directing all earnest money paid hereunder to be refunded to Buyer . . ." Based on my reading of the contingency, a seller could get another offer and just stall on giving an answer to the buyer's inspection request. Once the time has elapsed, the purchase agreement is canceled without further notice. I do warn my buyers that the seller can back out based on their inspection requests. Most sellers do not, but in your case, they obviously did.

[Sharon]

In most states, it is not legal for the seller to cancel the purchase agreement unless the buyer defaults, and even then there is usually an allowed time to fix the problem. However, we had a seller cancel the agreement when we had a question about how to address a problem discovered during inspection. They did not give us an opportunity to remove the contingency because in the meantime they had another offer on the house. Is this legal in Minnesota?

[larry cragun]

Hi Bonnie, Haven't seen much of you lately. Hope all is well. Lar