Buying an Investment Property – Understanding Contract Contingencies

Contingencies are special conditions written into the purchase agreement when you make an offer on a property. Contingencies protect you by creating a way for you to pull the plug on a bad deal without losing your deposit. You can also use them to negotiate better terms from the seller. Stipulating too many contingencies in the contract will make you look like a difficult buyer and can weaken your offer. However, there are a few contingencies that you will want to use in most situations.

The most common contingency is the inspection contingency. This is standard in almost any real estate transaction. It gives you a specific, short period of time to bring in a house inspector and determine if there are any major problems with the house. Depending on the results, you may ask the seller to repair the problems, reduce the price, or give you a credit back. If the seller is unwilling to do any of these, you're entitled to withdraw the offer and reclaim your deposit.

Another common contingency is the financing contingency. This means that the offer will be rescinded if you can not get a loan. You usually have up to twenty-one days to get approved for at mortgage and give proof of the commitment to the seller. Within this contingency, you should state the maximum interest rate you are willing to pay for the loan. Otherwise you may be forced to take out a loan with unfavorable terms, and that's the last thing you want to do.

One more contingency that may be included in the contract is a marketable title contingency. This requires the seller to produce a title report or commitment providing that the title is insurable. Even if title problems are uncoovered, the seller can keep the contract in effect by settling the outstanding issues before the deal closes.

It's important to remove major contingencies by the deadlines set out in the contract. Miss a cutoff date and you'll miss the chance to get out of the deal without a penalty. The inspection contingency in particular should be addressed early. The seller will not want to make any repairs that you've asked for until contingencies are removed.

You should try to limit contingencies in the contract to the ones that benefit you, the buyer. However, it's good business practice to offer terms that give the seller something he wants, too. For example, you can tailor the length of escrow to the seller's needs. Some sellers want to close the deal within thirty days because they've already taken possession of their new home. Other sellers want a longer escrow, for tax reasons or to give them time to move. Ask what would suit the seller and be as accommodating as you can.



Source by Katherine Guilford

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