Accepting contingencies can be difficult for sellers

In this buyers market it is rare to encounter a real estate offer that doesn’t have some kind of contingency. The buyer obtaining loan approval is an example of a contingency and is an event that must happen before the transaction can close.

Contingencies normally have an expiration date or time for them to be removed so this should be specified in the contract. These expirations times or dates are negotiable so whatever the buyer and seller agree to needs to be stated in the purchase agreement. Because sellers want to know that they have a solid deal, they want a short contingency whereas buyers want as much flexibility as possible to conduct inspections arrange financing or even more rare in this market to sell the buyer’s home.

Sellers should realize however that the contingency time should be realistic. If buyers become nervous because of an approaching deadline they could get cold feet and abandon the transaction.

With the tightening credit market a full approval for a mortgage takes longer than it used to especially because lenders are asking for more documentation and proof of the buyers ability to perform. Some want documentation directly from the IRS before they render final approval which can delay approval by 5 days. Occasionally underwriters require a second appraisal or review appraisal to insure the buyer is not paying too much for the property. This also obviously delays the final approval.

In some situations the contingency for financing doesn’t have an expiration date before the closing date. Depending on how the purchase agreement is written if the buyer can’t finalize financing before closing the buyer may back out and receive the earnest money back. This can certainly make the seller uncomfortable not knowing if their home is sold until closing. One alternative outlined in the Minnesota financing addendum is to have the financing contingency expire before closing. If it appears that the financing contingency will expire the expiration date can always be extended with the approval of all parties.

For sellers who have to wait till the closing date it is wise to have the possession date at least one day after the closing date so if the closing does not happen at least they will not have fully packed to move.

If the contingency is not actively removed what happens. Some contingencies automatically expire, commonly referred to as passive removal. An example of this in Minnesota is the inspection contingency. If the buyer has an inspection and does not notify the seller of defects they want corrected within a specified time the inspection contingency is automatically removed and the purchase is another step closer to closing.

The preferred method however is active removal of a contingency. In the case of the inspection contingency it is common if the buyer will not be asking the seller to correct any defects to notify the seller of that intent in writing.

The assumption by the seller that if the buyer doesn’t remove a contingency the earnest money becomes theirs is another common misconception. Many contingencies have clauses that specify that the buyer is refunded the earnest money if a buyer doesn’t remove a contingency so sellers should make sure they understand the details of the contingencies.

IN CLOSING: Sellers should not assume that just because the buyers don’t remove a contingency on time that they do not intend on closing. Even if the buyers indicate they do not intend to close, get it in writing.