Contingency Removal in Residential Income Property Transactions

Introduction
Contingencies are an essential part of any real estate transaction, offering protections for buyers to verify property details, secure financing, and resolve potential issues before fully committing to the purchase. Removing contingencies is a formal process that confirms the buyer’s readiness to proceed with the transaction.

This lesson will guide you through understanding contingencies, tracking their deadlines, and the steps to formally remove them using the appropriate forms. A video tutorial is included to demonstrate how to complete and submit a contingency removal form.

What Are Contingencies?

Contingencies are conditions outlined in the purchase agreement that must be met or waived for the transaction to proceed. They are critical for protecting the buyer’s earnest money deposit and ensuring the property meets their expectations.

Standard Contingencies

1. Inspection Contingency

   • Allows the buyer to evaluate the property’s physical condition through inspections.
   • Typical Deadline: 17 days in California.
   • Buyer may withdraw or renegotiate if significant issues are found.

2. Appraisal Contingency

   • Ensures the property appraises at or above the agreed purchase price.
   • Protects the buyer from overpaying or failing to meet lender requirements.

3. Loan Contingency

   • Makes the sale conditional on the buyer obtaining financing.
   • Typically includes a deadline for the buyer to secure final loan approval.

Additional Contingencies

• Sale of Buyer’s Property: Requires the buyer to sell their current property before completing the purchase.
• Other Custom Contingencies: Can include terms like securing specific permits or resolving tenant lease issues for income properties.

Locating Contingencies in the Purchase Agreement

All contingencies are explicitly outlined in the purchase agreement, including:

1. Contingency types (e.g., inspection, appraisal, loan).
2. Specific deadlines for each contingency.
3. Terms for resolving or removing contingencies.

Pro Tip: Highlight these sections in the agreement to ensure you can easily reference and track deadlines throughout escrow.

Tracking Contingency Deadlines

Why Deadlines Matter

• Contingencies must be removed in writing before their deadlines.
• Failure to remove contingencies does not automatically put the earnest deposit at risk but may allow the seller to issue a Notice to Perform.

Best Practices for Tracking Deadlines

1. Use a transaction management system (e.g., the WE ARE REALTY platform) to monitor due dates.
2. Set reminders for contingency deadlines and plan tasks (e.g., inspections, appraisals) well in advance.
3. Communicate with your client about upcoming deadlines and their implications.

Contingency Removal in California

Removal Requirements

In California, contingencies must be removed formally in writing using a contingency removal form. Simply allowing the deadline to pass does not automatically waive contingencies.

Notice to Perform

If the buyer fails to remove contingencies on time:

1. The seller may issue a Notice to Perform, providing at least 48 hours for the buyer to comply.
2. If the buyer does not act within the notice period, the seller has the option to cancel the agreement.

Pro Tip: Advise your client to avoid unnecessary delays in contingency removal to maintain a smooth transaction and avoid risking cancellation.

How to Complete a Contingency Removal Form

The Contingency Removal Form is a standard document used to formally waive or remove specific contingencies.

Steps to Complete the Form:

1. Identify the Contingency: Clearly specify which contingency (e.g., inspection, appraisal, loan) is being removed.
2. Reference the Purchase Agreement: Include the date and details of the agreement to ensure clarity.
3. Indicate Partial or Full Removal:
   • Partial Removal: For removing some contingencies while others remain active.
   • Full Removal: For waiving all contingencies.
4. Client Signature: The buyer must sign the form, acknowledging their decision to proceed without the specified contingency protections.
5. Submit to Escrow and Seller: Deliver the signed form to the escrow officer and seller’s agent promptly.

Pro Tip: Use the WE ARE REALTY platform to generate, complete, and submit contingency removal forms efficiently.

Options After Contingency Review

1. Proceed with Removal:
   • If the client is satisfied with inspections, appraisal, and financing, submit the form to remove contingencies.
2. Request Modifications or Repairs:
   • If issues arise during due diligence, the buyer can negotiate repairs, credits, or price reductions before removing contingencies.
3. Withdraw from the Agreement:
   • If significant problems are found, the buyer may choose to cancel the transaction within the contingency period to avoid losing their earnest deposit.

Case Study: Managing Contingency Removal

Scenario: A client purchasing a 4-unit residential income property has a 17-day inspection contingency, a 21-day loan contingency, and a 15-day appraisal contingency.

Approach:

1. Day 5: Scheduled inspections immediately after opening escrow.
2. Day 10: Reviewed inspection findings and negotiated a $5,000 repair credit.
3. Day 14: Appraisal confirmed the property value; removed the appraisal contingency.
4. Day 20: Loan approval finalized; removed the loan contingency.
5. Day 22: Submitted the final contingency removal form, allowing the transaction to proceed toward closing.

Result: The client’s proactive approach and clear communication ensured all contingencies were resolved on time without jeopardizing the deal.

Best Practices for Contingency Removal

1. Stay Ahead of Deadlines: Schedule all necessary tasks early to avoid last-minute issues.
2. Maintain Communication: Keep your client informed of their options and obligations for each contingency.
3. Be Thorough: Ensure all inspections, reports, and financial approvals are complete before advising your client to remove contingencies.
4. Use Technology: Leverage tools like the WE ARE REALTY platform to track deadlines, complete forms, and maintain transaction transparency.

Conclusion

Removing contingencies is a pivotal step in finalizing a real estate transaction. By carefully managing deadlines, addressing any issues uncovered during due diligence, and formally completing the contingency removal form, you can help your client proceed confidently toward closing.

Next Steps:

1. Watch the tutorial video to learn how to complete and submit a contingency removal form.
2. Review a recent or hypothetical transaction to practice identifying and tracking contingencies.
3. Use the WE ARE REALTY platform to monitor contingency deadlines and streamline communication with all parties.

In the next lesson, we’ll explore preparing for closing, including final walkthroughs and reviewing the closing statement.