THIS IS IMPORTANT - it's important to be aware of common reasons transactions don’t make it to closing.
As a buyer, you should be aware of the terms that are usually baked into the purchase agreement. Yes, the buyer signs the purchase agreement prior to submitting it, but I haven’t had a buyer yet who reads through the entire document and understands every condition.
As the seller, it’s important to know the conditions that must be met prior to closing and know what you’re agreeing to before accepting an offer.
These are critical milestones in a real estate transaction and the main reasons transactions fall through. This is where having an agent who is experienced, thoughtful, and knows how to navigate these difficult conversations is key. There are additional contingencies not listed below, but I covered the main ones to be aware of.
WHAT IS A CONTINGENCY?
A contingency is a clause or condition that must be satisfied, usually prior to closing. The contingencies are primarily a result of what is written in the purchase agreement, but contingencies can also be contained in addendums, amendments, counter offers, and/or inspection responses.
COMMON CONTINGENCIES:
FINANCING – that is, the buyer being approved for financing the home. The buyer has a set number of days (listed in the purchase agreement) to obtain mortgage approval. Someone may be denied for a loan based on events that may have occurred between the preapproval and the loan approval. If the buyer is not approved for financing, the transaction ceases.
INSPECTIONS – reserving the right to have inspections is covered in the purchase agreement. If the buyer conducts inspections and finds a defect, they have to give the seller an opportunity to remediate. If the seller is unwilling or unable to remediate the defect, then the buyer may terminate the agreement. The underlined statement is important to know. I’ve had buyer’s think they can terminate a purchase solely due to a poor inspection report, but you have to give the seller an opportunity.
The exception to this rule: if an as-is addendum was accepted with the purchase agreement. The as-is addendum states that the buyer can still conduct inspections and if a previously undisclosed defect is discovered, the buyer can terminate the purchase or choose to move forward with the transaction. The seller cannot be asked to make repairs. The house is sold in the current condition.
Defect (in Indiana) is defined in the purchase agreement as a “condition that would have significant adverse effect on the value of the Property, that would significantly impair the health or safety of future occupants of the property, or that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises”.
APPRAISAL – there is a statement in the purchase agreement saying if the property does not appraise for at least the agreed upon price, it is up to the buyer if they can or are willing to proceed.
I’ve had this happen in the past and there a few different options here:
The purchase price is lowered to the appraisal price.
The seller won’t budge on the purchase price, and the buyer agrees to make up the difference between the purchase price and the appraisal price in cash.
The seller will not agree to the lower the purchase price to the appraised amount, the buyer does not want to/cannot pay the difference in cash, and the transaction is released.
The seller and buyer split the difference between the appraisal price and the purchase price, and the buyer pays the difference between the appraisal price and newly agreed up purchase price in cash.
Instead of the buyer paying the difference in cash (as in 2. or 3.), the lender actually agrees to lend for the purchase price rather than the appraised price. This scenario may not be as plausible in post 2020/2021 conditions, where inflation is not climbing as steeply. But, I have had this happen multiple times with different lenders, once in 2020 and another time in fall of 2022.
FLOOD ZONE – the buyer can opt to terminate the purchase if they find out the home requires flood insurance, if the buyer indicates this option in the purchase agreement. Your agent should check this box, to make sure you have this option.
Additional contingencies depending on the transaction:
SALE OF BUYER’S HOME – there is a section dedicated to this contingency because it such an important one. There are three options here:
The transaction is not contingent upon the closing of another transaction,
It is and here is the address, which is scheduled to close on this date (aka, they have an accepted offer), or
The offer is contingent upon the acceptance of an offer on the other house, see first right contingency below.
FIRST RIGHT – this is when the buyer has not yet accepted an offer on their home, and they need/want to sell it prior to buying this other home they putting an offer in on. In this situation, the buyer’s home may or may not even be listed, but the first right contingency addendum specifies this and other details. See my blog post on First Right Contingencies for more detail.
REPAIRS REQUESTS – these are requested as a result of the inspection or appraisal. If the seller agrees to completing repairs or actions prior to closing, they must be completed. If the seller does not complete the repairs they agreed to, the buyer may refuse to close or push closing for the repairs to be completed.
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