How to Use Contingencies

Everyone is familiar with the conversation where the other person says, "Yes, but.." This person is agreeing with you but only if certain conditions are met.

A purchase agreement is similar in that you are agreeing to buy a property subject to certain things being met. The conditions you set are called contingencies.

It is uncommon to have a purchase agreement without contingencies. In fact, contingencies are an essential part of many offers. In general, contingencies are added to protect you (the buyer) but may also serve to protect the seller.

All of the contingencies of a purchase agreement must be met before the sale can be competed.

What are some Examples?

Contingencies can be virtually any conditions you wish to set. They can be anything such as having your Uncle John approve the central furnace or your Aunt Mary is satisfied with the kitchen sink. The sale is "contingent" upon all of the conditions being met. Contingencies are also called "subject to's" since the sale is "subject to" something happening.

An important contingency is a financing contingency. It states that the purchase is subject to the buyers being able to obtain a loan for the required amount. If you can not get the loan you need, the sale is canceled and you deposit is refunded. It is very important to have this contingency since you will loose you deposit if you are unable to get a big enough loan. Making an offer without a loan contingency is very risky.

What are Some Common Contingencies?

There are many contingencies that will protect you (the buyer). Here are some you will definitely want in your purchase agreement:

* You will be able to inspect the property and must approve the inspection.

* The sellers must disclose problems with the property and you must approve of such disclosures.

* You will be allowed to make a final inspection of the property just before the deal closes and confirm that the is no new damage since you originally inspected it.

* You will get your deposit back if the sellers back out.

* You can back out if you are unable to get financing.

Depending on your situation, there are many other contingencies you should add. For example, if you are moving to the area because of a new job. You will want a contingency stating that if you don't get the job, you can cancel and get your deposit back.

Make sure that you clearly state your needs to the agent or attorney preparing you agreement. If there are any special conditions that must be meet (such as being able to cash in some stocks for a down payment), make sure it is in writing a contingency. Otherwise you may be unable to complete the purchase on time and lose you deposit. In some cases, you may be sued by the sellers for performance. They may demand you complete the purchase or pay associated damages.

Who Writes In the Contingencies?

A contingency is a legal document and must contain the proper language to be legally binding. For this reason contingencies are ideally crafted by attorneys. However, since this is a normal part of business, many real estate agents are extremely versed in writing contingencies. In fact, agents may be far more experienced in this area than an attorney. In practice, your agent will be more than capable of writing the contingencies you need.

Whom Does the Contingencies Protect?

The contingencies noted so far are intended to protect you (the buyer). They allow you to back out of the deal without consequences if something does not work out -- you can't get financing, you discover problems with the house, you lose you job, etc..

As noted, contingencies may also be added to protect the sellers. Such examples are the sellers may insist that the transaction be completed within 30 days. If you are unable to get you cash together or get your financing, you could lose the house and your deposit!

Some sellers may want you to purchase the house "as is." That is, no matter what's wrong with it, the sellers won't be responsible for it. You may for example find that after making an offer, the septic system badly needs $15,000 worth of repair. If you agreed to by the property "as is" then you will be stuck paying the difference.

Contingencies Can Become Deal Points

Naturally, you will want to have contingencies that benefit you (the buyer) and want to exclude those that potect the seller. This is therefore a process of negotiation where contingencies become deal points which you can influence the actual cost of the transaction.

A deal point is a specific point on which the deal depends. For example, you want the sellers to replace the broken sprinkler system. So you include a contingency stating that the sellers must repair it. If the sellers refuse -- perhaps they have been watering the lawn by hand and are unwilling to fix it for the buyers.

Now you have a deal point. What are you going to do?

Well, this depends on how important the sprinkler system is to you. If you feel that you can't live without it and are unwilling to budge, you can refuse to remove the contingency. The seller can either accept the offer or reject it. If the sellers accept, you've got your sprinklers. However, if they reject, you're not getting your new home.

Often a better way if dealing with this situation is to calculate the cost of repairs and adjust the contingencies to compensate. For example you may retract your contingency for the sprinklers and insist that they leave the ceiling fans you really like. Perhaps the sellers were not looking forward to taking them down anyway and are willing to compromise on this point. In which case, although you will need to get the sprinklers fixed, you have saved several hundred dollars on the purchase of new fans.

You Can Use A Contingency to Get Yourself a Better Deal

The skillful negotiator will use contingencies to improve the deal. And there is really no limit to the type of contingency you can craft. Deal points can be over anything ranging from the date escrow closes to the specific closing costs the buyer and sellers must pay.

A great way to start negotiating is to find the sellers weak point and apply the pressure there. For example, the sellers may absolutely need to close the deal within 25 days so that they can purchase a new home. You agree as long as they fix the septic system, lower the price, repair the sprinklers, and leave the ceiling fans. In this way, they have met their criteria by giving you the superior deal.

Remember, that although contingencies are great points for negotiations, they are there to protect you. They offer you an easy way to back out if something goes wrong.

Avoid Unnecessary Contingencies

Sometimes when buyers discover the great protective value of contingencies, they insist that extra ones be placed in the purchase offer. For example, you insist that the purchase become contingent on you not losing your job before the deal closes. (You pretty much get this protection in any event, since if you lose your job, the lender probably won't give you a mortgage, and you can back out using the financing contingency.)

Or you insist that the deal be contingent on your not getting ill during the escrow period, or your spouse not falling out of love with the home, or your getting approval of the purchase from you parents. Remember, you can make the deal contingent on anything!

The problem is that each time you add a contingency, you weaken the deal. The sellers ask themselves, "Why does the buyer insist on this?" If the quickest answer is that the buyer is wishy-washy and may not go through with the deal, the sellers may simply refuse to sign. You may squash a perfectly marketable deal simply by insisting on unnecessary contingencies.

As many real estate agents have witnessed, lawyers can ruin an otherwise marketable deal by adding contingencies favoring their clients to the point where the other party simply won't go along. While legal advice is great, sometimes common sense and human nature play a stronger role.

Beacon Hill Highlights:

• HOA Annual Dues: $665
• Total Tax Rate: 3.06%
• Waller School District
• Highly Ranked for Quality Builder by J.D. Power & Associates in 2010
• Minutes from shopping and restaurants
• Easy access to Hwy 290, Grand Parkway

MORTGAGE CENTER

How Much Income do I Need in Order to Qualify?

Do you need to know how much money you must earn to purchase the house of your dreams? This calculator will help you figure it out.

Savings: When you finance through our Preferred Lenders, Long Lakes Homes will pay your 1st year Home Owner Insurance, your owner’s title policy, and $500 in closing costs –

(these incentive valued from $3000 to $5000 determined by your loan amount)

Preferred Lenders:

1 . Texas Capital Lending

      Gerald Boudreaux. 

     NMLS # 1130687

       Cell:     832-693-0991

       Efax:    281-754-4699

       gboudreaux@txcapital.net

       Apply Now

2 .BenchMark

    WILL NEVOTTI 

    214-733-9620 Cell

    will.nevotti@benchmark.us 

       APPLY NOW  

      Mark Prague

     832-205-1595

    (Spanish Speaking)

       mark.sprague@benchmark.us

        APPLY NOW! 

3. Network Funding

    Robert Tinh  

      C: : 713-992-7100 

     robert.tinh@nflp.com 

     Apply Now

4. CORNERSTONE

    BRANDON POLKA  

     NMLS# 200915

      Direct: 281-296-1892

      BPOLKA@houseloan.com

      Apply Now

Not sure exactly what you need to be asking about? These 10 questions to ask when buying a new construction home will help get you started.

1. Is the lot cost included?

   When you’re exploring new construction options, you’ll see that each plan comes with a base cost. This is the cost of the structure itself, as well as base interior and exterior features (we’ll get into those in a little bit). What may not be included is the cost of the land, so be sure to ask if the lot cost is figured into the base.

   If the lot cost is included, ask if there are premium costs for certain lots. It’s possible that the base cost does include the lot, but the remaining lots in the development all have added costs for certain features that you can’t opt out of, such as look-out windows in the basement or wider yards. If the lot cost is not included, ask what it is (and whether there are additional premium costs) and factor those into the base price for the house.

2. How long will building take?

   It’s important to know what you’re getting into timing-wise with a new construction build, particularly if you have a house to sell first or you’re going to be renting. While the building process is prone to delays and you won’t be able to get a finite schedule for how long the build will take, you’ll be able to get a general idea of what you can expect. Be sure to also ask if the build time includes the time it takes to get the permits, since those will typically take about 30-45 days to obtain.

3. What warranties are provided with the house?

   Just because a home is brand new doesn’t mean that no problems will arise. Fortunately, most new construction homes come with one or more warranties that protect you in the event of a mishap early on, including a short term whole-house warranty and a longer structural warranty. Ask what the warranties include and how long they last. While you can always buy your own home warranty, you should expect that the builder will cover you in some way for at least the first several years.

4. What are the standard finishes?

   Does a base cost look too good to be true? That might be because the builder is expecting you to spend big when it comes to finishes like flooring and countertops. Ask what types of finishes are included, and better yet, go through the model unit with the sales representative and have them point out what’s standard and what is an upgrade. You likely won’t meet with the design center until after you’ve gone under contract, so it’s important to figure out early what sorts of finishes and appliances you can expect to be included in the home’s base price.

5. Is landscaping included?

   Depending on the size of your yard, landscaping, including sodding and putting in trees and plants, can set you back several thousand dollars or more. Is that a cost you’ll have to factor in on top of the home purchase? Some builders include your basic yard work, while others leave you with unfinished land that becomes your responsibility to landscape (and generally must be completed in a set amount of time, per the contract). Ask whether landscaping is included, and if so, what that entails and if there is any sort of warranty on the materials so that if your newly sodded grass dies right away or some other mishap occurs you’re not responsible for fixing it.

6. Does the contract include a cost escalation clause?

   New builds are notorious for last minute surprises, but you don’t want to be on the hook financially if it happens. A cost escalation clause allows the builder to charge you for any unanticipated costs that arise as a result of necessary labor or materials. So if lumber prices go up before the builder has purchased the materials for your flooring, or an unexpected delay adds a few weeks onto the build, you’re on the line for those costs. If you’d rather not deal with the stress of unanticipated costs, find a builder that doesn’t include a cost escalation clause in the contract.

7. Are there any homeowners rules or regulations?

   Even if there is no homeowners association for the development, the builder may still set some guidelines as far as what’s allowed and what’s not on your property. For example, you may not be able to use a particular type of fencing or install a shed in your backyard. It’s better to ask this question early and know what to expect than to move in and find out that you can’t bring into fruition certain plans you had for the space.

8. Are there any financial incentives for using the builder’s preferred lender?

   Some builders offer discounts on closing costs if you obtain your mortgage through a company that they have a relationship with. Ask if these sorts of financial incentives are offered, but don’t make your final decision about where to get your mortgage based on the discounts alone – you may still be able to find a better deal through other lenders. It’s still good to know however if there are benefits to working with the builder’s preferred mortgage company.

If it’s your dream to build a new construction house, go in to the process with an open mind and a clear idea of what you can expect. The more questions you can ask in the beginning, the less surprises you’ll potentially face in the future.

And as with any home purchase, be sure to have an attorney read over your contract so that you can be sure everything is fair and equitable. Some buyers of new construction prefer to go in to sales meetings with a real estate agent as well, though in my own experience, I didn’t find that to be necessary. Be smart, ask the right questions, and at the end of the day (or fine, year) you’ll end up with a beautiful home built just for you.