“Buyer’s offer has no contingencies.” This phrase has become increasingly common in the Bay Area’s competitive real estate market, where buyers are looking for every advantage to stand out from the crowd. Whether you are the buyer or seller, it is important to know what contingencies are and where to find them in your contract.
In this three-part series, I will explain the typical real estate contingencies and help you identify them in your California real estate contract.
What Are Contingencies in Real Estate?
A contingency is a condition that must be fulfilled before the sale of a home can close. In California, these conditions are typically found in the buyer’s offer. The most common form we use to write an offer is California Association of Realtors (C.A.R.) Form RPA-CA.
Real estate contingencies typically fall under three major categories: appraisal, home inspection and mortgage approval. Think of these contingencies as a buyer’s and seller’s safety net. If a home does not appraise at a certain value, if an inspection reveals a major problem, or if the buyer cannot obtain adequate financing, the parties can back out of the contract without penalty.
In addition to specifying contingencies, your contract will set specific deadlines. For example, the buyer will have 17 days to complete inspections (see below). It will also state when and how notice of cancellation must be given and received.
California’s Inspection Contingency: 14(B)(1)
In California, the default inspection contingency gives the buyer a little more than two (2) weeks – 17 days – to complete all inspections.
C.A.R. Form RPA-CA, section 14(B)(1) reads:
BUYER HAS: 17 (or ___) Days After Acceptance, unless otherwise agreed in writing, to: (i) complete all Buyer Investigations; review all disclosures, reports, lease documents to be assumed by Buyer pursuant to paragraph 10A and other applicable information, which Buyer receives from Seller; and approve all matters affecting the Property; and (ii) Deliver to Seller Signed Copies of Statutory and Lead Disclosures and other disclosures Delivered by Seller in accordance with paragraph 10A.
During this 17-day contingency period (or the timeframe agreed to between the parties), the buyer typically hires independent inspectors to look at the home’s roof, foundation, structure (termites, mold, etc), and any other areas of the home the buyer sees fit. Contact your real estate agent for referrals to trusted inspection professionals.
If any major problems are found, a buyer may then ask the seller to make repairs or may request a monetary credit for repairs at closing – see section 14(B)(2). The seller, however, has no obligation to respond to either request.
Lifting The Buyer’s Inspection Contingency
After the agreed upon inspection period has passed, the seller must request that buyer lift their inspection contingency. If seller does not obtain a contingency removal, buyer’s inspection period remains in effect, “based on a remaining contingency.” See 14(B)(4). This means that technically buyer’s inspection contingency can remain in effect all the way through the deal — meaning buyer can back out and recover any earnest money deposited with escrow.
Sellers, your agent will likely send a “Notice of Buyer to Perform” (NBP) requesting that buyer either remove the contingency or back out of the contract. This will allow you to move on to other back-up offers if buyer fails to adhere to the agreed-upon inspection timeline.
Should I Write a No-Contingency Offer?
Well, that depends. Has your seller already had a professional inspection completed? What did the inspection reveal? Was the foundation adequately inspected? What about the roof? How old is the home? What updates have been recently done by the seller? Were permits obtained for any structural work?
I have represented Bay Area buyers who successfully wrote offers with no contingencies and I have represented buyers whose succesful offers included more contingencies than are typical. No home is the same and I think your offer should reflect your comfort with the home’s condition, your ability to obtain financing (or pay cash), and your overall risk tolerance.
I recommend that buyers do as much due diligence as possible before writing an offer. There is no substitute for being 100% confident in your offer before it is sent on to the seller. This will set the tone for a smooth transaction all the way to the closing table.