Most offers to buy in real estate are going to contain contingencies that favor the buyer. As a seller, you are going to have to accept this fact. However, you can restrict these contingencies in ways that favor and protect you.

What Is a Contingency?
A contingency is a clause in a purchase offer that makes the offer subject to the performance or approval of some task or event. (That’s why these are also sometimes called, “Subject to” clause.) They are typically written in the following manner, “This offer is contingent upon….” and thereafter follows the subject of the contingency.

The subject can literally be anything from the serious to the frivolous. A typical serious contingency clause makes the deal subject to the buyer obtaining financing. If the buyer doesn’t get a loan, there’s no deal. A frivolous contingency might make the offer subject to the buyer getting approval for the deal from her mother in another estate.

Each time the buyer adds a contingency to the offer, it weakens that offer because it gives the buyer another way out, without penalty (losing the deposit). Savvy buyers add lots of contingencies because it gives them more outs, should they choose to use them.

What Are Typical Contingencies?

Most offers will include several of the following contingencies:

* Financing Contingency. The buyer doesn’t get a loan -there’s no deal
* Disclosure contingency. The buyer has the right to approve your disclosures -No approval; no deal.
* Professional inspection. The buyer has the right to approve an inspection report.- No approval; no deal.
* Title approval. The buyer has the right to clear title.
* Termite clearance. You can’t supply termite clearance, no deal.
* Other reports (such as geological, flood, etc.) -If the buyer doesn’t approve; no deal.
* Bond payoff. You pay off existing public bonds on the property. You don’t pay; no deal.

As you can see, all of these contingencies favor the buyer, If you don’t perform as the buyer demands, he or she can simply walk away from the deal with clean hands. Or, depending on how it was written, take you to court to force you to pay perform as you agreed.

What Can You Do about Contingencies?

Your First Line of Defense Is to Strip Them Away.
You can counter the buyer’s offer by eliminating the contingencies in a counteroffer. Simply cross them out. The buyer either purchases your house without contingencies, or there’s no deal.

Your agent will explain the actual method preferred in you area for rejecting contingencies. But remember, even if you don’t change the price, the moment you change the sales agreement, for example, by removing a contingency, you’ve rejected the buyer’s offer and you’re countering. The buyer may or may not accept.

In all but the very hottest market, however, there’s usually going to be “no deal.” Most buyers realize that most of these contingencies are necessary to protect them. They feel they must have the financing contingency, in case their loan doesn’t go through. They must have the right to approve an inspection report, in case your property happens to have a sinkhole underneath. And so on.

 

So as a practical matter, it’s unlikely you’ll be able to simply remove most buyer’s serious contingencies and still have a deal.

Your Second Line of Defense Is to Restrict the Contingencies. Restricting contingencies makes it harder for the buyer to use them as an excuse to back out of the deal. By restricting a buyer’s contingencies, you sweeten the offer to favor you.

How Do I Restrict the Contingencies?
There are at least three ways you can restrict a contingency: time, money, and performance:

Restricting the Time on a Contingency – A buyer is very likely to demand the right to approve a professional inspection report. You’re simply going to have to concede this to get the deal.

The inspection report actually protects you, the seller. After having an inspection done, a buyer is much less likely to come back later on and say there was a hidden problem with the property.

However, you don’t have to let the buyer dawdle on about the inspection report indefinitely. You can limit the time for the buyer’s approval. A typical restriction is 2 weeks. Yes, the buyer can have the property professionally inspected. But, if the inspection isn’t completed and the buyer’s approval given within 14 days, there’s no deal. You’re not obligated to proceed and may begin selling the house to someone else. (Or alternatively, depending on how it’s written, if the buyer doesn’t disapprove within two weeks, the assumption is that the property is that the property is okay and the deal moves forward.)

This puts the onus on the buyer. He or she must move quickly to get the report and either approve or disapprove it. Yes, the buyer can still back out, but only during the next 14 days. After that, the buyer must bite the bullet and approve the report (or negotiate with you over any problems) or back out. No dawdling.

The same holds true for the disclosures and any other reports the buyer may want.

You can add a contingency of your own, here, namely that you have the right to continue showing the property and accept back up offers until the buyer removes a contingency. This puts additional pressure on the buyer to act.

Restricting the Money on a Contingency – You may also restrict the contingency in terms of money. For example, the buyer demands that you put a fence around the yard as a condition of sale (subject to). You have to agree that the yard needs a fence, particularly since you’ve got a pool and that poses a health and safety hazard. So you agree to the fence. But, you limit the amount of money you’ll spend on it. For example, you’ll put up a fence, provided it doesn’t cost more than $2000.

Or, you agree to provide a termite clearance, which means having an inspection and paying for repair of damage, provided it doesn’t cost more that $2500. Restricting the money amount leaves you a way out. If it turns out it will cost more, there’s no deal. Or you can reopen negotiations.

Restricting the amount of money you’ll pay for a termite clearance usually sends up a red flag to the buyer. “Why is the seller worried about termites?” the buyer is likely to ask. Adding this restriction could cause a wary buyer to back out of the deal by refusing to sign your counter. Be careful with what and how you restrict contingencies.

Restricting the Performance of a contingency – You can also restrict how the buyer must perform on a contingency. For example, a typical financing contingency will say something such as the purchase is subject to the buyer obtaining a 30-year fixed-rate loan for not more than 8.5 percent interest (Usually, the interest rate is mentioned because it determines the monthly payment, and most buyers have a maximum monthly payment for which they can qualify.)

However, you realize that it will take 30 days to close the deal and interest rates, currently at 8.5 percent, are rising sharply, What if at the end of 30 days, when the deal is ready to close, interest rates have moved up to 8.75 percent? Suddenly, the buyer doesn’t have to close and can simply walk away from the deal.

One way of restricting this is to counter the interest rate. Instead of the 8.75 percent current rate, you change it to 9.5 percent. The buyer must move forward if the market interest rate moves as high as 9.5 percent.

But, what if the buyer can’t qualify at 9.5 percent? You’ve got a weak buyer who may not be able to complete the purchase in any event. Besides, you’re not really asking for something unreasonable. If the buyer can’t get the mortgage for any reason, the overall financing contingency applies and he or she can still walk away. By raising the interest-rate restriction, you’ve just made sure the buyer doesn’t have an easy out.

Who Writes in the Restriction?

YOU CAN, but if you are working with a real estate agent, then typically, real estate agents or attorneys will write up the original offer, including any contingencies. Therefore, you should have a knowledgeable agent or attorney write up your restriction. The language is important and if it’s done improperly, it could have unanticipated consequences. If you’re not a savvy seller in this area, have a competent person do it for you.