Getting an offer on your home is just the start. There are three ways your home sale can fall through and choosing the right buyer for your home involves carefully understanding the real estate purchase agreement (RPA).
The RPA, along with it’s required disclosures and addendums, is 15 pages of small, densely packed legal jargon. On offering day you will probably stop listening after we tell you the price, but there a lot of other important details!
The RPA has three main contingencies that mainly benefit the buyer. You can think of a contingency as a blockade – your home sale will fall apart if the blockade (contingency) is not removed.
I listed the typical time period for each contingency in Glendale CA in 2019. Your area might be different.
We will talk about what happens when a home sale falls through in a little bit.
1. The Loan Contingency
A loan contingency protects the buyer when they need a mortgage loan to complete the purchase. The mortgage bank will review the legal documents for the property as well as re-verify the buyer’s credit, employment, and bank balances.
The bank occasionally finds new information during this process that can threaten the loan approval and the home sale might fall through. Thankfully this is fairly rare as long as your listing agent carefully vets the buyer’s finances before you accept the offer.
The loan contingency the real estate purchase contract protects the buyer from the uncertainty of the bank’s loan process and it is often the last hurdle to cross in the process. Once this contingency is removed it is usually safe for you to finalize your plans for moving!
The loan contingency in a Glendale Ca home purchase typically expires 17 days.
2. The Appraisal Contingency
A mortgage lender will require an appraisal to ensure their loan is protected. The goal is for the home to appraise for the purchase price. If it doesn’t, your home sale could fall apart.
How The Appraisal Works
The bank orders the appraisal from a statewide pool of appraisers. While we do not control who the appraiser is, we might be able to request a switch if the original one isn’t local enough to understand our market.
It is important to note the appraiser is trying to justify the buyer’s offer on the home, not establish true value for the property. Therefore, it is pretty rare for an appraisal to come in higher than the purchase price. Also, you do not have the right to find out the final appraisal number or to get a copy of the appraisal report. You will only know if the bank has approved.
What happens if the appraisal is lower than the purchase price?
The appraisal contingency in the real estate purchase contract states that the home will appraise for no less than the purchase price. If the appraised value is too low the contract might fall apart.
However, the parties can negotiate a compromise! The buyer might agree to increase their down payment amount or, in rare instances, the buyer can appeal the appraisal or get an entirely new one. If all else fails you can agree to lower your purchase price instead of risking your home sale falling through.
The appraisal contingency typically expires at the same time as the loan contingency.
3. The Inspection Contingency
The largest part of the inspection contingency involves the physical condition of the home. You can read about typical home inspections for Glendale Ca homes or the process of pre-sale home inspections.
The inspection contingency is also about inspecting non-physical attributes such as the condition of a home’s title, easements, permits, and insurability. A buyer might also inspect school districts, taxes and assessments, sun exposure and any other aspect they deem important.
If the buyer doesn’t like what they discover they might cancel the deal and the home sale will fall through.
It is more likely that the buyer will ask the seller to either fix a defect or negotiate a credit in escrow. The seller can agree, disagree, or propose a counteroffer to the buyer’s request.
The inspection contingency default is 17 days, but we commonly require just 10 days. Our goal is to give just enough time for the buyer to complete the normal inspections, but not too much time to mull things over.
What Happens If The Contingency Is Not Removed?
There is almost an entire page devoted to this topic in the Real Estate Purchase Contract. There are strict rules designed to give everyone a chance to state their case and to keep the conversation moving forward in a timely fashion.
If the parties can not agree on how to remove the blockade (contingency) the home sale falls apart. The initial deposit is returned to the buyer (in some cases escrow fees may be deducted) and the seller is free to accept an offer from a new buyer.
It is important to note that the buyer must actively remove the contingency, it doesn’t just expire at the deadline. An expert listing agent is constantly moving the other side toward a resolution, they don’t wait for the last minute.
This is a Generalized Example!!
Each real estate transaction is unique. The examples I’ve described may not apply to your situation and you should seek the counsel of a Realtor or attorney if you have any questions. It is also important to understand that while this only applies to residential real estate sales in California, it does not apply outside of our state. If you are worried about how your home sale can fall through it is critical that you get the best expert advice possible!