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Protecting Yourself with Contingencies
By Texas Assoc. of Realtors
Wednesday, October 30, 2013 • Posted November 1, 2013 12:20 PM

If you are buying or selling a home, you can protect yourself and your assets by understanding and using contingencies. Contingencies are clauses written into your contract that give you time to manage one or more aspects of the transaction before proceeding to closing. Contract addenda include third-party financing, selling an existing home and "back-up" contingencies-to name a few. If you are in a situation that may require t ime to secure financing or to evaluate some aspect of the property, consider adding a contingency, because once an offer is signed, it becomes a legally binding contract.

Third-party financing

Let's say you've put your home on the market, and a potential buyer makes an offer. You may want to add a loan contingency that states how long the buyer has after the offer is accepted to get approved for a mortgage. Smart contingency clauses always have defined time frames within which buyers must complete an action or waive the contract. The time allotted is negotiable, but a third-party financing contingency may benefit both parties.

For example, a buyer gives you the earnest money as a deposit and then decides several days or weeks later that they just don't want the house. Maybe something better came on the market. That buyer might come back to you and claim that they were unable to secure a loan commitment through a lender, hoping that you will just forgo the original agreement and move on. A third-party financing contingency is a contract that states that the buyer "shall make every reasonable effort to obtain approval for financing." In other words, if you have this clause in the contract, a buyer who has made an offer and signed the addendum must prove that he or she was unable to get a loan.

On the other hand, a third-party financing condition addendum also protects potential buyers. What if you put a bid on a house only to learn that, for one reason or another, you did not qualify for the loan? Even worse, the seller could legally keep your deposit. Your signature on the third-party financing contingency would relinquish you from penalties, including forfeiture of earnest money and obligation to purchase. However, it's important to note that buyers who have submitted an offer and signed a third-party financing addendum but fail to qualify for a mortgage must notify the seller within the agreed upon terms of the contingency. In other words, if you don't get the loan you wanted, don't assume the seller will automatically drop the contract. Legally, you must do so by providing the seller with the appropriate paperwork. Talk to your Texas realtor to learn how to protect yourself with a third-party financing contingency.

Selling an existing home

If you are currently a homeowner and need to sell your existing home before buying another one, there is a contingency clause for you. There is an addendum promulgated by the Texas Real Estate Commission (TREC) that permits buyers to terminate a contract if they are not able to sell their present house before closing on the home they are purchasing. Again, the time frame is negotiable. If the buyer is unable to meet the terms of the contingency, the contract will terminate and the earnest money is refunded to the buyer, or the buyer can choose to waive the contingency.

If offers are coming in hand-over-foot, many sellers will think twice before accepting an offer that's subject to the buyers selling their present house. However, some sellers will agree to this clause. TREC's addendum also protects sellers who agree to this contingency. It states that if the seller receives a second offer and accepts the second offer as a back-up contract, then the seller may notify the first buyer of this second contract. At that point, the initial buyer can elect to either terminate the first contract or waive the contingency.

Back-ups

Sometimes a buyer is interested in a particular house, but learns that the seller has already agreed to sell the property to another buyer. There is a chance that the first deal may fall through. The second buyer can make an offer contingent on the first contract failing to close. In other words, "I'll buy your home if the first buyer doesn't close." This is attractive to sellers because they can easily move to another deal if the first one falls through. If the first deal closes, then the second buyer simply moves on, having invested little or no time and money in the back-up contract.

If you have done it once, I'm sure you'll agree that buying or selling property is a complex transaction involving multiple contracts and addenda. If you do not understand some aspect of the offer or sale, ask a Texas realtor to explain it to you. Keep asking questions until you're sure you understand what you are signing.

For more information on the contingencies, I invite you to visit TexasRealEstate.com.

For more information on buying or selling property in Texas, please call Waymond Lightfoot at (210) 386-5201.

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