Contingencies In Real Estate Contracts

[Vincenzo Corleone]

Does anyone know if it's unusual, as a buyer of a house that needs renovation work, to insert into the contract a contingency that if estimates of the cost of renovation exceed a certain amount, you can legally back out of the deal with no penalty? I suppose, if this were possible, you'd have to provide a list of things you wanted included in the estimate to the seller to agree or disagree on each item before he would accept such a contingency.

Anyone have such experience?

 

[Bamaman]

Most contracts will have a clause about home inspection, and you would request deficiencies found by the inspector will be corrected by the seller.

Real estate agents will have a specific inspection wording when the contract is prepared.

The buyer will most often seek a compromise on minor items.

 

[NgineER]

No-I have not heard of that. We've bought some properties for cash with the understanding that it is priced to account for a lot of renovations, sometimes 1-3x the purchase price. You could bring a contractor in during a showing and get the back of the envelope estimate. I am seeing a pretty hot market in my area and I would not see anyone agreeing to your request. You can usually just rely on the inspection report to find something to back out of the deal unless it is sold as is.

 

[W2R]

That type of contingency would never go over here, not in a million years. Sellers would choose to go under contract with different buyer, instead.

Now we DO have a legal requirement that a home must be habitable when sold unless it is specifically sold as a tear down. So, when I bought my present home, my home inspectors found that the under-slab plumbing needed to be replaced (an expensive but common problem here due to subsidence of the surrounding soil). The sellers were then required to have that done at their own expense while the house was in escrow, and I didn't have to pay a penny of the over $25K for that. But the reason they had to pay for it was because the home was not legally habitable without working plumbing.

 

[SecondCor521]

Now we DO have a legal requirement that a home must be habitable when sold unless it is specifically sold as a tear down. So, when I bought my present home, my home inspectors found that the under-slab plumbing needed to be replaced (an expensive but common problem here due to subsidence of the surrounding soil). The sellers were then required to have that done at their own expense while the house was in escrow, and I didn't have to pay a penny of the over $25K for that. But the reason they had to pay for it was because the home was not legally habitable without working plumbing.

@W2R, wow.

OP, I've personally never seen that kind of contingency. Around here, there is a standard fill-in-the-blanks RE contract, but anyone can write their own contingencies, and so in practice the buyer and seller can agree to pretty much anything.

Like @W2R's environment, it's a seller's market here, so in the end it really depends on what each party thinks is reasonable and what alternatives each party has (seller can find another buyer, buyer can find another house). For something that is more unusual, I would expect either that the RE agents involved would help write the contingency language or that there would be some back-and-forth between the two parties to hash things out.

I've never seen it happen, but if there's a disagreement between the parties about contingencies and who escrow funds should be refunded to, then a local court can get involved.

 

[pb4uski]

Does anyone know if it's unusual, as a buyer of a house that needs renovation work, to insert into the contract a contingency that if estimates of the cost of renovation exceed a certain amount, you can legally back out of the deal with no penalty? I suppose, if this were possible, you'd have to provide a list of things you wanted included in the estimate to the seller to agree or disagree on each item before he would accept such a contingency.

Anyone have such experience?

If I understand you correctly, the buyer is considering buying a property that requires significant renovation work and is willing to offer $x to buy the house as long as the renovation work doesn't exceed $y but the buyer needs reasonable access to the house to assess whether the cost of the renovations will exceed $y or not.

I think that would be unusual, but contingencies can be anything the parties agree them to be so you certainly could propose it.... if they accepted then the seller would just need to grant you reasonable access to the property to make the assessment.

It might be more palatable if it was for a fixed period of time and was combined with a provision that they could continue to market and show the property and if they got a competing offer that they want to accept that you would have 48 hours to waive that provision if you wanted to.

 

[street]

I have no experience with what you have explained but can say here, with every home that is sold the buyer has the option of a inspect of entire home. These inspections are very through from structural, electric, plumbing etc.. They even use a camera on the sewer pipe that belongs to the property till it joins the utilities responsibility. With that being said all signed agreements are in contingency till all issues are fixed and re-inspected or a bid of cost to repair those issues are substracted from the agreed price of that home. So, if hand shake on 200K and the cost of a plumbing bid of 20K the cost of that home would be agreed to sell for 180K. The seller fixes or has it fixed and re-inspected before sale goes through.

I'm sure this is a practice all over the US thou.

 

[Vincenzo Corleone]

Thanks for the replies.

To be clear, the renovation work of which I speak is nothing involving major structural damage that, if unaddressed, would eventually lead to the house falling apart.

I'm only speaking of renovating bathrooms and kitchen, pulling up old wood flooring and laying new flooring, etc. For no other reason than to "bring the place up-to-date".

But, yes, before doing the renovations, I will do a home inspection first to spot anything major.

Thanks again.

 

[NgineER]

Bring a contractor to a viewing and ask him to prepare a bid or a back of the envelope calculation.

If it is a buyers market they might be willing to hold for you, but in my experience you need to offer what you think it is worth. Sellers could care less in general about what your plans are and tehy often have inflated expectatinos of what their home is worth.

 

[38Chevy454]

Thanks for the replies.

To be clear, the renovation work of which I speak is nothing involving major structural damage that, if unaddressed, would eventually lead to the house falling apart.

I'm only speaking of renovating bathrooms and kitchen, pulling up old wood flooring and laying new flooring, etc. For no other reason than to "bring the place up-to-date".

But, yes, before doing the renovations, I will do a home inspection first to spot anything major.

Thanks again.

I don't think as a seller they would agree to anything that is basically cosmetic. Those items you listed are things you can see before putting in an offer. A detailed inspection is mainly to see areas that are not normally accessible or to identify code issue type problems. Those type findings become a negotiation once the initial sale contract is in place. Renovation work is something that, if needed, would just be reflected in lower sales price IMHO.

But as with any contract, the terms are whatever the parties agree to. So if you can get an agreement, then it is legal to have it. Just ensure that both parties are knowledgeable about what it means and how it is implemented.

 

[gauss]

How long do you expect the seller to give you until this contingency expires?

Why not just bring your contractor with you when you view the house with your real estate agent prior to the placing a formal offer?

-gauss

 

[CardsFan]

Thanks for the replies.

To be clear, the renovation work of which I speak is nothing involving major structural damage that, if unaddressed, would eventually lead to the house falling apart.

I'm only speaking of renovating bathrooms and kitchen, pulling up old wood flooring and laying new flooring, etc. For no other reason than to "bring the place up-to-date".

But, yes, before doing the renovations, I will do a home inspection first to spot anything major.

Thanks again.

While anything is negotiable, I do not see any rational seller agreeing to a contingency offer for this kind of work. These upgrades can range from $10k to over $100k depending solely on what you decide you want.

I think you either bring your contractor with you to get an estimate before you make an offer, or you educate yourself on these costs and then make an offer.

 

[Vincenzo Corleone]

...Why not just bring your contractor with you when you view the house with your real estate agent prior to the placing a formal offer?

-gauss

Yup, I took this advice, thank you. I've arranged for a contractor to view it with me.

When I first made the original post, I wasn't optimistic that I'd be able to get the contractor on such short notice, and I was also concerned that I'd have to make an offer at the time of viewing (it's a hot location), but I was wrong on the first assumption and I think it's likely I'm wrong on the second assumption as well.

Thanks, everybody.

 

[pb4uski]

You could always make an offer contingent on a home inspection and then bring both the home inspector and your contractor to the home inspection... the home inspector inspecting the home and the contractor gathering information to give you a ball park estimate on the cost of the renovations.

IME during the inspection period you can bail for any reason, so if the renovation estimate exceeds your confort level you just say the house didn't pass inspection and you bail.

 

[Vincenzo Corleone]

You could always make an offer contingent on a home inspection and then bring both the home inspector and your contractor to the home inspection... the home inspector inspecting the home and the contractor gathering information to give you a ball park estimate on the cost of the renovations.

IME during the inspection period you can bail for any reason, so if the renovation estimate exceeds your confort level you just say the house didn't pass inspection and you bail.

Huh. I understand that laws vary from state to state, but are you sure it would be so easy as to tell the sales agent and seller that it didn't pass inspection?
They'd just take your word for it? Wouldn't the sales agent and/or the seller insist on seeing the inspection report?

 

[pb4uski]

Check with your agent but that was what I was told by my agent when we sold my mother's house a couple years ago.... the house inspection contingency basically gives buyers a free pass to bail.... and we had our first sale fall through because the buyer wanted to essentially renegotiate the sales price after the home inspection so politely told them to go pound sand.

I guess that a seller could tighten it up a bit by insisting in the purchase and sales agreement that the home inspection contingency would need to identify needed repairs exceeding $x, but I don't think that is done in practice as a practical matter because it can easily get into a pissing contest that holds up both parties.

 

[ExFlyBoy5]

Huh. I understand that laws vary from state to state, but are you sure it would be so easy as to tell the sales agent and seller that it didn't pass inspection?
They'd just take your word for it? Wouldn't the sales agent and/or the seller insist on seeing the inspection report?

"Pass an inspection" is a VERY subjective determination and unless it's just WAY out to lunch, most courts would side w/ the buyer. Most inspections are done during the option period anyway and if the option is written correctly, you can bail for just about any reason at all.

As to the original questions you can ask for almost ANYTHING in a contract and your hypothetical isn't too crazy. It might not be common, but it's not unreasonable, either. Personally, I would perhaps just offer a longer option period...maybe 10 days?

I would also note that while contract law is pretty standard across the board, many states have enacted statutes that apply to residential home sales. Where I live, to "get out of" a contract because of an inspection, there has to be a material defect in the home. Nonetheless, this is how the BOILERPLATE language is, so it can be modified a bit to give more leniency to the buyer. Again, this can be VERY state specific...and NO, this is NOT legal advice.

 

[Aerides]

There's a bit difference between passing inspections, vs bringing in an independent contractor for estimates to bring a place up to current design/decor. The latter can vary wildly depending on the budget of the customer. You can do cheap or you can do fancy. A kitchen can be $20k or $100k in any given house. Gutting/upgrading is driven mostly by square footage and taste.

If the question is "i want to see what my contractor would price to get the house the way I like it, and I want to back out if that price is too high" - the answer is get him over here today then, and sign the contract after you know.