Contingencies for an Offer to Purchase Real Estate

Contingencies: Contingencies in the offer are conditions that must be completed before the offer can become valid. If the conditions have not been completed by the deadline, then the offer becomes incomplete or void. For example, the Buyer may need third party financing from a bank before purchasing the Seller’s home. Therefore, it is quite common to have a financing condition in the Offer, whereby the Buyer will not be obligated to complete the purchase unless the adequate financing described in the Offer can be obtained. Contingencies/conditions are not limited to the scope of Buyer’s financing; it may involve completion of building inspection, providing proof of clear title, or any other issues deemed important enough by both parties and which require completion before the deal can solidify. 

Transfer Disclosures Statement: The Real Estate Transfer Disclosure Statement describes the condition of a property. When a property is sold a copy of this statement must be given to the prospective buyer before the transfer of title. The seller and any brokers/agents must be involved with this statement and it is up to the agents/brokers to deliver the statement to the prospective buyer.

Seller Property Questionnaire: The Seller Property Questionnaire contains more than 50 questions in over a dozen categories and provides the buyer with further information about the property. This document is used to assist the buyer’s purchasing decision by educating them on the property they are interested in. It is up to the seller to create a thorough questionnaire in effort to avoid any complaints from the buyer regarding the properties information.

Natural Hazards Report: The seller or the seller’s agent is required to make disclosures if the property is in one or more of the following areas/zones:

  • Zone A or Zone V (special flood hazard area) (CAL. GOV’T § 8589.3)
  • An Area of potential flooding represented on a map as an area that would be affected if a dam fails. (CAL. GOV’T § 8589.4)
  • A designated very high fire hazard severity zone. (CAL. GOV’T § 51183.5)
  • An earthquake fault zone. (CAL. PUB. RES. § 2621.9)
  • A seismic hazard zone. (CAL. PUB. RES. § 2694)

Sellers or the seller’s agent must make disclosures if they have actual knowledge that the property is located in any of these areas or; if the county offices considers the property to be located in any of these areas.

Statewide Buyer and Seller Advisory: The Statewide Buyer and Seller Advisory is a document that covers most situations that could go wrong with the real estate purchase and Its purpose is to limit issues that could occur post-closing. This document warms the prospective buyer to hire a specialist in each and every area related to purchasing a property. For buyers, this document is worth reviewing since it acts as a roadmap for things to look for during the diligence period. This document is important for sellers as well since it provides them with insulation and guidance against claims.  

Lead Base Paint Disclosure (federal): According to Section 1018 of the Residential Lead-Based Paint Hazard Reduction Act of 1992, the HUD and EPA are required to provide the disclosure of known information on lead-based paint and lead-based paint hazards before the sale or lease of properties/homes built before 1978. Sellers, landlords are legally required to disclose any history of lead paint on the properties, provide records and reports regarding this hazard, provide an EPA-approved information pamphlet to the buyer’s/tenants, include a lead-warning statement in contracts/leases, and provide the buyers with a 10-day grace period to have the current paint in the property inspected.

Preliminary Title Report: The title report will reveal various liens, encroachments, easements and anything else recorded against the property for the buyer. The title company produces the report from a search of county records in order to issue title insurance, and any liens against the property are listed as “exceptions” to title insurance. The three main subjects to review for this document include the following:

The Legal Description: This portion describes the exact location of the property as in where it is located, boundaries, and nearby streets/intersections. It can also include condominiums or planned units. The description will also include the property’s common areas, easements (non-exclusive and exclusive), and details regarding any storage or parking that is included with the property.

Property Taxes: on the title report, property taxes typically show up as the primary “lien”. Properties cannot be transferred to a new owner if the current owner has any outstanding property taxes that are due to the city/town or county. The top lien will indicate whether taxes are due or paid in full, and taxes must be settles prior to paying debt holders.

Mortgage Liens: these are typically found directly below property taxes and they are ordered first, second and third. The largest lien holder usually takes the first position, but the second lien often assumes the first position. During the closure of a sale, the liens are to be paid in the order that they appear on the title report. If the situation is a “short sale”, then there are not enough proceeds from the sale to pay the remainder of the property taxes and all of the lien holders. Often one or more lenders will be “shorted” of the amount they are owned. A sale can only close if the lender or lenders agree to the short payoff. Other things that could show up on the title report include: easements, CC&R’s, Restrictions, historic oversights, and planning requirements.

Market Conditions: These are the factors influence the housing market in a specific area, these factors include the cost of living, demographics, the supply and demand, mortgage rates. Market conditions effects the types of homes people are interested in and the cost people are willing to pay. The real estate market is greatly influenced by the status of the economy, the unemployment rate, and the costs of goods/services. If the unemployment rate is high, then jobs are hard to find and there will be a decrease in people seeking mortgages. In regard to the costs of goods/services, when people are paying more for necessities like groceries and health care, then people will be likely not able to afford a new home. Another key factor is the condition of interest rates, when they are high, securing any type of loan (like mortgages) are more expensive. Due to this issue, the overall demand decreases and lowers housing prices.