Contingencies, Inspections, Appraisals and Title Companies 

Contingencies. A contingency is a condition in a contract that either must be met in order for a contract to become legally binding or that must be satisfied or else the contract may be cancelled. Below are some of the typical contingencies that may be found in a contract for the purchase and sale of a home, each of which must be successfully cleared in order to continue toward settlement:

• Home Inspection : This is probably the most common contingency in a real estate sales contract. This contingency gives the buyer a right to have an inspector of his choosing (usually a professional, certified home inspector) conduct an inspection of the structure, systems, appliances and overall condition of the home. The contract will specify the time in which the contingency must be completed. After the inspection, the inspector will provide a detailed report on the condition of the home and identify items that are in immediate need of repair or replacement. The contingency in the contract will typically give the buyer the option of either (a) canceling the agreement altogether based on the results of the inspection report or (b) requesting that the seller resolve the certain items identified in the report or provide a financial credit of some sort (e.g., a price reduction or a credit toward closing costs) to the buyer to compensate for the unsatisfactory conditions revealed by the inspection. If the buyer elects option (b) and the buyer and seller reach agreement on the items to be resolved, this contingency can be cleared and the agreement on repairs or credits will be documented and signed as part of the contract. If ultimately, the buyer and seller do not reach agreement, the contract may be cancelled and the earnest-money deposit will be returned to the buyer. A similar process is followed for other inspections of the home, including radon inspections, mold inspections, soil inspections, boundary lines, etc.
   
• Financial Contingencies: Some contracts are made contingent upon the buyer's ability to secure financing to purchase the home. The contingency will specify the type of financing the buyer is seeking and will set a time frame in which the buyer has to secure it. If the buyer is unable to secure the financing within the specified time, then the contract can be voided. Increasingly, buyers are making offers after they have been pre-approved for financing and therefore, may not need to include such a contingency. Buyers understand that a seller would be less inclined to accept an offer with a financing contingency since that is something that is beyond the seller's control or influence. A seller would not want to take his home off the market for a buyer who has not yet demonstrated his ability to make the purchase by being pre-approved.
   
• Appraisals: An appraisal is also a type of financial contingency, but it is not one that it tied to the buyer's financial capabilities, but rather it is tied to the appraised value of the home for sale. When a buyer signs a contract to purchase your home and is financing that purchase by obtaining a mortgage, the buyer's mortgage lender will want an appraisal of the property to ensure that the property is sufficiently valuable to serve as collateral for the mortgage the lender will be granting. So, contracts often include an appraisal contingency stating the purchase is contingent on the lender's appraiser determining the property is worth at least as much as the purchase price agreed for the property. The lender will send a professional appraiser to assess the property and provide a report. The appraiser will consider recent sales (usually only within the last 6 months) of homes that are comparable to yours in your area and will also take account of the homes available that are currently on the market. The appraiser also considers the condition of your home and other unique factors relating to your home that may increase or decrease its value in relation to other comparable homes. If the appraisal results show that the property is worth the purchase price or even more, then the appraisal contingency has been cleared. But, if the appraisal report indicates a lower value than the sales price, then a negotiation on the price will likely ensue. The buyer can of course agree to purchase the property at the stated contract price despite the appraised value, but that may often mean the buyer must come up with more cash at settlement to do so since the loan will be based on the appraised value and not the purchase price. Otherwise, the buyer may request that the seller reduce the purchase price to the appraised value or something in between the appraised value and the contact purchase price. If the parties can agree on a price reduction, then the sales agreement will be amended and the transaction will proceed. If the parties cannot reach agreement, then the contract can be voided and the buyer can receive a refund of his earnest-money deposit. As your agent, I will help you in avoiding potential appraisal issues by helping you to correctly price your home in the first place.
   
• Condominium/Cooperative/Home-Owner Association Documents. When selling a home that is part of a condominium or cooperative building or subject to a mandatory home owner's association, remember that the buyer will have an opportunity after signing a contract to purchase your home to review all of the pertinent governing documents and financial information related to the condo, co-op or HOA. Washington DC, Maryland, and Virginia specify by law a period of time during which a buyer has to consider those documents and allows the buyer the right to cancel the contract and receive a refund of his earnest-money deposit, as long as the buyer exercises that right before the designated time period expires. This is a statutory required contingency and is not typically negotiated out of the contract.

For each of these contingency events and any others, it helps to have a qualified, experienced real estate professional there to aid you with any resulting negotiations that may be required to clear these contingencies and continue toward settlement. As your agent, my job is not done when the contract is signed, but rather I am your advocate and resource through every step and stage of the selling process and settlement.

The Title Company. By custom, it is the buyer's prerogative to select the title company (also called a settlement agent). The settlement agent's job will include ordering a title search, a location survey (if required), payoff statements (to payoff the seller's existing mortgages and liens against the property), and real estate tax information in preparation for closing. Before the scheduled settlement, the settlement agent will clear title and issue title insurance commitments to the respective parties. The settlement agent is also responsible for working with the lender to receive the final loan instructions and documents and in preparing a "HUD-1 Settlement Statement" which is the detailed itemization of all financial elements, charges, credits, etc. related to the sale of the home. Generally, the actual settlement or closing involves an explanation of the documentation by the settlement agent and acquiring signatures from the parties. If all is going smoothly, this can take about one hour, but it can be longer if the particular transaction is more complex or if issues arise that require resolution. At the end of settlement or, in some cases, a few days later, the settlement agent will turn over the proceeds of the sale to the seller (after all payoffs and fees and commissions are paid). The settlement agent will also ensure that the seller's mortgages and liens are paid off and that the releases are recorded, and will record the deed transferring ownership in the home to the new buyer. I have worked with several title companies in the Washington DC area and can recommend excellent settlement agents who will deliver a smooth, accurate transaction at a reasonable fee.

The Next Step -- Buying Your Next Home. Now that the sale of your home is well on its way to a successful settlement, it's time to start preparing for your next home. As your trusted real estate partner, I'm ready to help you prioritize your goals for this next project. I'll get you off to a good start by finding the best interim arrangement for you while you're in between homes, if needed. For more information and for any additional questions, please feel free to contact me at any time. Please also review the “Buyers Road Map” for information about the buying process.

© Nadia Nejaime, 2006