What is a Contingency and How Does It Work? - Part 1

This podcast episode will review the fundamental concept of contingencies in real estate transactions.

Listeners will understand contingencies, why they are essential, and how they function in residential real estate sales.

This episode will lay the foundation for a wide-ranging understanding of contingencies and their role in ensuring a smooth and protected real estate transaction process.

Host: Realtor® Pat Kapowich

Realtor Pat Kapowich isn't just any agent; he's a Certified Trust and Probate Specialist, a Certified Real Estate Brokerage Manager, and has been a staunch advocate for consumer protection throughout his career.

Rooted in the vibrant heart of Silicon Valley, Pat operates out of his hometown, Sunnyvale, California. Reach out to his office at 408-245-7700 or drop him an email at Pat@SiliconValleyBroker.com. License: Broker# 00979413.

For up-to-the-minute housing market data tailored to your locality, access Pat's website for complimentary, real-time pricing and trend insights. [https://www.siliconvalleybroker.com/market-trends}

Transcript

Podcast: What is a Contingency and How does it Work? Part 1

[00:00:00] 

I had an instructor in one of my hobbies and he referred to the topic as jazz. There was a lot going on and in a real estate transaction, real estate attorneys speak about all the moving parts today. We are speaking about contingencies. My best friend, and I believe it's your best friend as well. It's everybody's best friend.

It's not location, it's not an all cash sale. It's not a quick sale, it's contingencies. So let's take a look in this series. What is a contingency and how does it work? Part one.

What is a contingency? One of my favorite real estate attorneys here in Silicon Valley often refers to it as an action based on another action. 

The California Association of Realtors Real Estate Attorneys put together a Q and A for their realtors, and they refer to a contingency as. [00:01:00] Under contract law, a contingency provides a party to the contract, the ability to condition performance on the occurrence or non occurrence of another event. Now back to my real estate attorney here in Silicon Valley.

For those of you new to real estate, or it's been a while since you've had a real estate transaction, a contingency is a clause in a home sale contract. The buyer informs the seller In this contingency clause, I will buy your property contingent upon having my inspectors conduct. Inspections and issue a report.

If the buyer doesn't like what he or she sees or hears, the buyer can cancel the sale and retrieve their earnest money deposit and go buy another home. Or the home buyers can renegotiate based on surprises and new [00:02:00] issues or deferred maintenance, or allow the seller time to address the deferred maintenance and make repairs.

Early this month, I had a fixer upper in a sought after neighborhood for weeks in writing and in conversation, I let the home buyers and the agents know that a contingency for property inspections, is my company policy, and with the approval of the home seller, the successor trustee.

There were no exceptions. We were not going to enter into a transaction without a property contingency. Before, during, and after the offer deadline, we received 25 offers. Five of the offers came in without contingencies. Now, why is that important? 

Agents [00:03:00] representing home sellers, also known as listing agents. Often proclaim that a non-contingent offer is the best for their seller. Nothing could be further from the truth. In reality, we are hired to protect the home seller, and that means protecting the home seller after close of escrow. My job as a seller's agent is to protect my home seller. Not only now, but especially after the home sale. A home buyer can have real or imagined problems and visit a real estate attorney and say, I don't want this house anymore.

I didn't understand what I was doing. I didn't understand the concept of contingencies. I felt rushed. I relied on my agent. We wanna make sure that the home happy before, during, and after the ratification of a purchase offer, and especially after moving in[00:04:00] 

Allowing the buyer to do inspections is the safest way to conduct a real estate home sale. I've made sure that there are contingencies. For inspections for the home buyer. When I represent a home seller, rarely do I have a home sale fall apart. It's extremely rare. If I have any renegotiating, 

for instance, the buyer might have several contingencies in a real estate purchase contract. The inspection contingency, the buyer will buy your house contingent upon having inspections. Or cancel the sale, get their deposit back. The buyer will buy your house contingent upon selling their condominium or townhouse in another area and successfully closing escrow.

The buyer will buy your house contingent upon having it appraised for the contracted [00:05:00] sales price. You get the picture on the buyer's side, so for the buyer, they might have an inspection contingency, a financing contingency. An appraisal contingency the sale of their current residence contingency. They might have a contingency for the common interest development.

That is the homeowner association for condo, townhouses, co-ops, planned unit developments, and nowadays they might have an insurance. What is the seller contingency? The seller contingency is in the real estate purchase contract. The seller will sell their home to you contingent upon finding a suitable replacement property. The seller will sell the property, complete the sale, contingent upon getting approval from, say, a family member to ratify the contract or from a bank official [00:06:00] if 

the home is in a short sale situation where the loans are more than the home is worth. 

 I've done this many times, the seller will sell the home to the home buyer contingent upon finding a suitable. Replacement property and securing a contract on that home, the seller will sell the home to the home buyer contingent upon successfully retrieving that quick claim deed that he or she never received from their former spouse.

The seller will sell the home buyer their current residence contingent upon getting approval from a bankruptcy judge. You get the picture, it might be from the buyer, it might be from the seller. A transaction might have both, now, let's get into it. Contingencies. This is the hub. And what are the [00:07:00] spokes? It's an action or inaction. Another spoke might be the home buyers. Another spoke is the home sellers and the agencies and the individual agents. 

I cannot stress enough the importance of home buyers and home sellers understanding contingencies. 

I was on a real estate Zoom call with the the former president of the California Association of Realtors in 2020, and the former president of the Santa Clara County Association of Realtors in 2008.

So he had baptism by fire and he reported that 85% of the home sales in Silicon Valley for the week prior. Now, I was on a Zoom call with him, and on July 19th, 2023, the week prior, 85% of the home sales in Silicon Valley were absent of contingencies, , also referred to as non-contingent [00:08:00] offers.

The biggest misconception is that contingencies protect the home buyer. Now while that's true, I. The biggest protection is for the home seller. Why is that important? I've been interviewing real estate attorneys for decades. I've had hundreds of sit downs with them, and they are always busy with claims, 

 One of the real estate attorneys that I follow grew up in a real estate family. Half a dozen realtors in his family, including his wife and sister, and he reported that 80% of the real estate claims for a home sale are filed by 

disgruntled home buyers with real or imagined problems. Real estate attorneys always add that real or imagined problems. [00:09:00] Another attorney that I mentioned earlier that represents one of the real estate associations here said that 90% of the real estate claims are filed by disgruntled home buyers against home sellers.

 I also follow one of the top real estate attorneys in Northern California. She managed, uh, She was in charge of Northern California for one of the largest real estate agencies in California, and she said, quote, I don't care what anybody says, it's closer to a hundred percent. 

Now, if the home seller is the target, 

how can we protect the home seller? How can we remove the home seller from being targeted after the home sale closes. One full disclosure, two pre-sale seller disclosures, pre-sale seller [00:10:00] inspections, and most importantly, 

home sellers and real estate agents representing home sellers should allow, should insist that home buyers have a cool off period and an inspection contingency. To make sure that they've done their due diligence, they've done their investigation. Speak now or forever, hold your peace and then remove your contingency so many days or weeks into the transaction, and then let's close this sale successfully without ramifications.

When I was on that Zoom call with my old friend who was president of the California Association of Realtors in 2020, I asked him today, in his opinion, what is the most important topic for real estate agents and their clients? He said, insurance

make sure you have a contingency for insurance. [00:11:00] So this is the same gentleman that had earlier in the Zoom call, mentioned that 85% of the home sales in Silicon Valley were non-contingent. He does his homework and the weeks prior he had listed from 75% to 85% the number of home sales, non-contingent,.

So you could see why contingencies are crucial for both parties in a real estate transaction, not only the home buyers and home sellers, but the agents and agencies representing them. 

The real estate purchase contracts. Now have the contingencies front and center that is on page one, grouped together. This allows for a conversation for the home buyers, with their agents to discuss timeframes and deadlines, the actions of the home buyers necessary to complete these conditions, securing inspections, securing an [00:12:00] appraisal, obtaining a loan.

They also need to discuss seller cooperation with access to the property. They need to discuss negotiation points. What happens if we will discuss the significance of each contingency regarding buyers and sellers, 

 I understand that home buyers and their agents proclaim they cannot get an offer accepted if there is contingencies in their purchase offer. I will address that. I can tell you in every hot market I've represented buyers with contingencies. I've done it recently in this seller's market with full contingencies representing buyers with full contingencies who had to either sell the property or lease a property before they could consummate the home sale. 

We will use real life case examples here to illustrate concepts This is Pat Kapowich, California Real Estate Broker 0 0 9 7 9 [00:13:00] 4. If you have a real estate licensee representing you and the state where you live, make sure you speak with that agent about contingencies and or their managing broker or supervising real estate sales manager.

Thanks again for listening. Talk to you soon.