Buying a House: Protect Yourself With Contingencies and Disclosures

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Buying a house is a give-and-take process. But it’s more than just giving your money and taking the keys. The contract process is wrapped around a series of contingencies and disclosures. Let’s break it down.

Contingencies are “walk-away” clauses in a contract that allow you to back out of buying a house if certain conditions aren’t met. Disclosures are the seller’s responsibility and reveal any and all property defects. These contract stipulations serve both sides of a real estate transaction — protecting you as a buyer and protecting the seller, too. All of them must be resolved, one way or another, prior to completing the sale.

Contingencies: From appraisals to termites

Think of a contingency as an “if-then” proposition. For example: “If I’m able to sell my current home, then I’ll buy yours.” It’s likely that several standard contingencies are already included in the purchase contract, such as the sale being subject to a property appraisal. This is an important stipulation because if a property appraises below the offer value, the buyer can be on the hook to the lender to make up the difference. You definitely want this contingency to be a part of any binding offer.

Here are some other common scenarios in which a contingent offer can come into play.

  • Financing: Perhaps the most common stipulation is a contract contingent on the buyer obtaining financing. This way, you’re not penalized if you don’t qualify for a home loan, and the seller doesn’t have his property off the market for an extended period of time for a nonqualified buyer.
  • Inspection: You should always have your potential new home thoroughly reviewed by a qualified home inspector. Remember, the appraisal is a valuation of the home for the lender; it doesn’t require a detailed examination of the property’s physical condition. A home inspector will perform a comprehensive analysis of the structure and mechanical systems — and, most importantly, identify items that need to be repaired or replaced. You can then negotiate for these issues to be resolved as a part of a contract inspection contingency.
  • Sale of a prior home: If you include this contingency, your offer is subject to the completion of the sale of your current house. A chain of sale clause is most often based on a specific time period  — generally 30-60 days — after which your contract is forfeited. In a seller’s market, including this contingency puts your offer at a serious disadvantage.

Other standard contingencies can include such things as a termite certification and the definition of a reasonable time period to close the sale. But there may be additional conditions that you want to include in an agreement.

While it’s important to protect your own interests, generally, the more contingencies in your offer, the less enthusiastic the seller may be to deal with you. You’ll have a better shot with spiking your offer with “if-thens” in a buyer’s market.

Some contingencies you can’t control

A few conditions of the sale are out of your control, such as lender approval of your loan or the home’s appraisal coming in with a sufficient value. Others will be your responsibility, like obtaining homeowners insurance — although a carrier has to approve the property for coverage, so that’s something you can’t fully control, either.

Another common transaction condition can be allowing the buyer to complete the sale of a prior home or providing sellers time to find their next residence. Either of these conditions needs to have a set time limit.

Buying a house: What you can control

A home inspection is in your best interest and allows you to back out of the deal if serious matters are uncovered. Your contract may stipulate that repairs must be made if problems are uncovered, but that can mean closing delays while contractors are scheduled and repairs are approved. You may prefer to renegotiate the sale price if significant improvements are needed.

In hot markets, buyers often pay for a pre-inspection report prior to making an offer — or forgo an inspection altogether. In other cases, sales contracts may be written with “a right to void.” This means you won’t require repairs that are suggested by the home inspection report but can cancel the sale without penalty.

To minimize delays at closing, you might decide to accept a previous condition “as is” by allowing a contingency deadline to expire. It’s a deliberate decision to offer a concession and can be used as the basis for a new condition at closing, such as a credit toward fees or some other discount. Be aware, though, that some lenders will restrict the amount of credits allowed.

A worst-case scenario can involve canceling the sale altogether. That’s justified only by a clear violation of a contingency by either party. If the seller has neglected to fulfill a condition, you’ll likely get your earnest money back from escrow. Not so if the failure to meet an obligation is on you.

Disclosures: What’s wrong with the property?

Sellers are obligated to tell you all known defects, environmental hazards, past damage and even homeowner association issues regarding the property in question. This is your first opt-out opportunity and a critical juncture in the homebuying process.

But disclosure laws vary from state to state, and while you hope the seller will reveal major property problems, you might not expect him to tell you about the noisy neighbors’ hot tub parties or the fact that the home sits beneath the flight path of landing jumbo jets.

Your agent, on your behalf, will obtain from the seller all legally required disclosures, which are generally due within days of signing the sales agreement. A lack of proper disclosure can lead to legal action. It’s best if all parties act in good faith, but in house hunting, remember the credo “buyer beware.”

Types of disclosures

A property’s background may reveal a variety of conditions, from neighborhood nuisances to on-site deaths. Unfortunately, because of wide-ranging local and national laws, you can’t always be sure what the owner is legally bound to tell you without asking a lawyer. There are four common disclosure forms:

  • Standard disclosures: Most state regulatory commissions and real estate associations provide boilerplate forms that a seller can use to check off what is — and isn’t — a problem. While it’s likely such forms will include major issues, it may not include details of homeowner association obligations, missing mechanical items or so-called “stigmatized” properties.
  • Natural hazards: This document will detail environmental and natural hazards, including fire, flood and earthquake zones.
  • Lead paint: Federal law requires owners of houses built before 1978 to disclose all known lead-based paint and hazards in a home. Buyers must also be given a 10-day window to test the house for lead, if they desire.
  • Sold “as is” exemption: While sellers are required to share all known defects of a property, the transaction can be completed “as is.” When both parties agree, the seller will not make or pay for any repairs, corrections or replacements, regardless of what’s found in an inspection. The buyer is essentially waiving all rights. This can be very risky for you as a buyer.

Start the clock

Keep track of contingency deadlines so nothing sneaks up on you — and so you won’t miss an important date to enforce a condition that the seller must meet. Having a calendar with all deadlines listed, perhaps even with pre-deadline notices a few days ahead, will help you stay on top of critical contingencies.

Throughout this process you’ll want to consult your agent to guide you along; in some more complicated cases you may even want the advice of an attorney. It’s easy to get tripped up by legal jargon, and sometimes what’s not in writing does the most damage.

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Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick