What are 3 Common Contract Contingencies for Home Buyers

Contract contingencies were called a somewhat derogatory term during the 1970s. Agents used to call contract contingencies “weasel clauses” because a contract contingency would let buyers weasel or slip out of a contract. This means that prospective homeowners could cancel a contract without penalty paid to the seller and there was no risk to the buyer.

Types of contract contingencies vary from state to state, but many contingencies are common to every state. Below are types of contingencies you can expect in Arizona:

Common Purchase Contract Contingencies for Home Buyers

Loan Contingency.

Even though a buyer may hold a loan preapproval letter, further investigations concerning the property or the borrower could result in a loan denial. Some loan contingencies run all the way to closings, and other types might exist for a few weeks. Most real estate sales contracts contain a contingency clause that permits the buyer to cancel the purchase if the loan is not approved by the lender. The lender could reject the loan for a number of reasons, including discovering a defect in title or receiving an appraisal that is too low.

Loan Appraisal.

The lending institution generally hires an independent appraiser to inspect and assess the value of the home. If the appraiser designates an appraisal value that is below the sale price of the house, then the mortgage lender could refuse to extend the loan. Some parties may include a specific appraisal contingency provision which would allow the buyer and seller to adjust the purchase price to match the appraisal so that the purchase can be completed.

Home Inspection.

One of the most important contingency clauses involves the right to perform an inspection by a professional. The buyer initially reviews and accepts the seller’s disclosure form called the Seller Property Disclosure Statement (SPDS) wherein the seller discloses any defects with respect to the property. Even upon receipt of a disclosure form that does not reveal significant defects, a Buyer has the right to hire a home inspector and conduct a complete inspection of the home as agreed upon in the contract. In Arizona, an inspection period is defined in the contract as a set number of days during which a buyer must perform any inspections of the property.

If the inspection reveals defects, the Buyer uses the Buyer’s Inspection Notice and Seller’s Response (BINSR) to request and negotiate repairs to the property.  The BINSR is an addendum to the Arizona Association of Realtors Residential Purchase Contract that allows, in an organized manner, the buyer to request repairs and the seller to respond. If the inspection reveals defects, buyers may walk away – or elect to ask the seller for repair work, closing credits, or a reduction in the sale price due to flaws that were uncovered. Sellers have a set period (5 days is common) to respond one of three ways: 1) agree to all of the buyer’s requests, 2) offer a modified solution back to the buyer, or 3) decline to make any amends. In response, the buyer can continue to negotiate, accept the seller’s position, or end the transaction within a set number of days (also 5 days, commonly). If the buyer declines the seller’s solution within the time period, they are free to end the transaction and recoup their earnest money. Of course, all communications back and forth between buyer and seller regarding inspections and negotiations around them must be done in writing.

Buyers should also take note of the following:

Lead-based Paint. If the home was built prior to 1978, the seller must provide the buyer with a lead-based paint disclosure form. Buyer should use certified contractors to perform renovation, repair or painting projects that disturb lead-based paint in residential properties built before 1978 and to follow specific work practices to prevent lead contamination.

Wood Destroying Pest Inspection. Termites are commonly found in some parts of Arizona. The Office of Pest Management (OPM) regulates pest inspectors and can provide the buyer with information regarding past termite treatments on a property. If pests or dry rot conditions are noted, there could be an additional expense to negotiate.

Roof Inspection. If the roof is 10 years old or older, a roof inspection by a licensed roofing contractor is highly recommended.

Sewer Inspection. Even if the listing or SPDS indicates that the property is connected to the city sewer, a plumber, home inspector, or other professional should verify.  If a home is not connected to a public sewer, it is probably served by an on-site wastewater treatment facility (conventional septic or alternative system). A qualified inspector must inspect any such facility within six months prior to transfer of ownership. Sewers can also get clogged from tree roots or deteriorate over time. Plumbing companies can insert a camera into the sewer line to check for damage during a sewer inspection. This is an expensive repair.

Private Well Inspections. If the home is not connected to city water but rather has a private well, buyers may want assurance that the water is potable and meets acceptable health standards. A well inspection can also deliver stats on how fast the water can be brought to the surface.

Swimming Pools and Spas. If the property has a pool or a spa, the home inspector may exclude the pool or spa from the general inspection so an inspection by a pool or spa company may be necessary.

Radon, Imported Drywall, Mold or Asbestos Inspections. Sometimes home inspectors will call for additional inspections by licensed entities to check for special situations such as radon gas, imported drywall, mold or asbestos; however, mold and airborne health hazards are most often not detectable by a visual inspection. To determine if the premises you are purchasing contain mold or airborne health hazards, you may retain an environmental experiment to perform an indoor air quality test.

Soil Problems. The soil in some areas of Arizona has “clay-like” tendencies, sometimes referred to as “expansive soil.” Other areas are subject to fissure, subsidence and other soil conditions. Properties built on such soils may experience significant movement causing a major problem. If disclosed or if the buyer has any concerns about the soil condition or observes evidence of cracking, the buyer should secure an independent assessment of the property and its structural integrity by a licensed, bonded and insured professional engineer.

Previous Fire/Flood. If it is disclosed there has been a fire or flood on the property, a qualified inspector should be hired to advise you regarding any possible future problems as a result of the fire or flood damage.

Preliminary Title Report. Title investigations will disclose easements, monetary liens of record, including the ability of the seller to transfer clean title to the buyer, and Covenants, Conditions & Restrictions (CC&R) information. If you can, always order a title policy. You might discover an easement falls on the property line right where you want to build a fence or put in a pool, and that could be grounds for cancellation of a contract.

Homeowner Association Documents. Buyers should obtain a copy of all homeowner association documents, including meeting minutes, if applicable. Pay special attention to the Home Owners Association (HOA) reserves. A deficiency in the reserves could be a red flag that the HOA is in financial trouble or the HOA dues might be in line for a steep increase.