Understanding Contract Contingencies
Most real estate contracts, whether they are written on the Multi-Board Contract or the Chicago Association of Realtors (CAR) Contract, contain several contingencies to protect the buyer. Although the parties can add or remove contingencies during contract negotiations, here is a quick list of those that are most common that you should be aware of:
1st/2nd Contingencies: Inspection & Attorney Review
Although inspection & attorney review are separate contingencies, they frequently go hand in hand & run concurrently. These periods kick off the first business day after the contract is fully executed. The buyer typically has 5-7 business days, depending on the contract, to conduct a home inspection & to have their attorney review the contract. By end of day on the 5th business day, the buyer’s attorney will either send a letter of inspection requests & contract modifications, OR request a brief extension of the contingencies. Extension requests are often the result of delays in getting the inspector into the property or the buyer’s need to conduct further due diligence (e.g., obtain quotes or bring in a specialist).
3rd Contingency: Condo Review
If this is a condo, then the buyer will have an agreed-upon amount of time, typically 5 business days, to review & approve all condo documents: declaration & bylaws, rules & regulations, 22.1 disclosures, meeting minutes, budgets, & more. The buyer is looking for terms that may restrict their intended use of the property (e.g., ability to have pets, ability to rent, etc.) & they are also looking for any indication that they may incur unexpected financial obligations (e.g., increased monthly assessment, special assessment, etc.). They may come back to you with questions or even additional credit/escrow requests if the association does not appear financially healthy. The timeframe for condo review is loose, meaning that although the buyer may have 5 business days upon receipt of the condo docs to raise any questions or concerns, the timeframe is typically extended until all questions & concerns are resolved to the buyer’s satisfaction. Therefore, it is beneficial to get the buyer condo docs as early in the process as possible.
4th/5th Contingencies: Mortgage & Appraisal
If the buyer is obtaining a mortgage to purchase the property, then the contract will be contingent upon them securing financing, per the loan terms outlined in the contract, typically with a lender of their choice. There will be a date in the contract for the loan to be “cleared to close” by the lender. If the buyer’s loan is not CTC by that date, then the buyer’s attorney will request an extension of the mortgage contingency. This is very common, as there are often procedural delays in the loan process that are outside the buyer’s control. The buyer is protected by the mortgage contingency through any agreed-upon extension. There is also often an appraisal contingency that goes hand in hand with the mortgage contingency. The lender will require a satisfactory appraisal of the property in order to approve the loan. Therefore, if the appraised value is less than the purchase price, this will typically force a renegotiation of the contract terms.
We hope this helps set expectations as you accept a contract! Nothing is over until it’s over, but we’re here to help you navigate each hurdle!
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