Contingencies in Real Estate Contracts
100 Real Estate Tips in 100 Days (Day 18)
A contract contingency is a prearranged loophole, a mutually agreed escape clause, in essence, a way for one of the parties to a contract to terminate the contract without penalty. In Colorado, real estate licensees must use a standard buy/sell contract created by the real estate. The standard contract has many contingencies (conditions) that protect both the buyer and seller, and, additionally there special versions and addendums to the contract that are designed to protect consumers participating in a transaction involving either a short sale or a property with a pending foreclosure action. In Colorado, the contract is date specific, meaning that if a condition or contingency is not resolved by a certain date, then the contract may be void orthe condition may have no further effect on the contract. First, let's consider the contract contingencies that affect the buyer of real property:
- The first contingency is really a condition, andit involves the ability of the buyer (borrower) to obtain a mortgage loan acceptable to the buyer. While the terms of the condition are very open, the date does matter. If the buyer does not provide evidence to the seller of the buyer's inability to obtain a loan by the condition date, thenthe buyer's earnest money is in jeopardy.Sellers would want a loan condition date well in advance of the closing date; buyers would want the date nearer to the closing date.
- Appraisal Conditions are also date specific. There is different language for different loan types, but the date for objection to a low appraisal is specific. Adequate time must be provided for the appraisal to be completed,reviewed by the loan underwriter, and any objection to be noted to the seller.This time will vary with loan type, the loan provider, and seasonal strains on the production system.
- The ability of the seller to provide a cleartitle, survey issues, and common interest community considerations are all conditions that must be resolved prior to any closing, and, again each issue has specific dates that are agreed in the contract. Exposure to the difficulties of a failed contract may affect either or both parties, so it is extremely important to ad here to the specific dates called for in the contract. These issues are at times not carefully attended to, so consumers are advised to be attentive with these dates.
- Lead-based Paint is an issue for properties built before 1978. Failure to provide the federally mandated lead based paint disclosure prior to the complete execution of a contract voids the contract!
- Buyers have the right to inspect any real property they wish to buy in Colorado.There are no limitations on the type of inspections the buyer may choose to perform, however, there is a completion deadline date, and an objection deadline date.
- The Property Hazard Insurance deadline is another date specific condition. Buyers should be certain of their ability to obtain property insurance at and acceptable cost prior to the deadline, or place their earnest money at risk.
Colorado has also instituted contract forms and disclosures that are specific to pre-foreclosure sales and "short sales". These forms offer the same protections to the buyer as noted above, plus providing considerable protection to the seller in such circumstances. Consumers should carefully consider the implications of such a sale or purchase.
Of course, attorney's can add client specific contingencies and conditions to any contract if acceptable to the parties involved, and builder create their own contracts which have contingencies designed to protect the builder.
There are many conditions and contingencies in any contract to buy and sell real estate in Colorado. Consumers should take the time to understand the implications of anycontract in which they participate.