Editor’s Note: Expert real estate attorney Robert Elias talks on how to protect deposits by buyers when dealing with contingencies in property transaction contracts.
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When buying or selling real estate, most attention is placed on the purchase price and the closing timeframe. While these are critical components of any real estate contract, it is important for prospective buyers and sellers to understand certain basic contingencies set forth in the contract. In the context of a real estate transaction, “contingencies” essentially detail specific terms and/or conditions that must be met prior to the obligation of the parties to close on the sale. In other words, properly drafted contingencies may allow a party to back out of the transaction without any penalty. Absent a contingency, a buyer’s typical penalty for failure to close is the loss of the deposit which can be substantial while the seller may be subject to remedy of specific performance. The following will detail some of the most common real estate contract contingencies utilized by buyers to protect the deposit:
- Inspection Contingency, also known as a “Due Diligence Period”: Most Florida residential real estate is sold “as is with right to inspect” which means what it says. The inspection contingency allows the buyer a predetermined number of days (typically ranging from 10-20 days), in which to confirm the property is suitable for purchase. During the inspection period, the buyer can evaluate every aspect of the potential purchase and typically engages a professional inspection company to conduct an inspection. Additionally, buyers may have other professionals, including contractors and subcontractors, conduct walk-throughs for remodeling estimates, etc. At any time prior to the expiration of this due diligence period, the buyer can elect terminate the contract (for any or no reason) by simply providing written notice of termination to the seller and thereafter receive a full refund of the posted deposit. More commonly, if the inspection or contractor walk-throughs reveal any unforeseen repairs/replacements or other surprises, the buyer can utilize the due diligence period to negotiate a purchase price adjustment or credit at closing.
- Financing Contingency: Historically, financing has been a common real estate contract contingency. Essentially, the provision specifies that the offer is conditioned upon the buyer being able to secure financing for the purchase of the property within a particular period of time (typically 30-45 days). Well drafted financing contingency provisions are specific as to both the type of financing and the particular terms (i.e. interest rate, down payment, length of loan, and fixed/adjustable, etc.). If the buyer is unable to secure a loan commitment letter from the lender within the specified financing period, then the buyer can provide written notice of same to Seller and receive a full refund of the deposit. Understandably, Sellers favor buyers who do not require lender financing.
- Appraisal Contingency: The appraisal contingency essentially allows a buyer to terminate the contract if the property does not appraise at or above the contract sales price. If the appraisal reflects a valuation below the contract purchase price, the buyer should alert the seller and, thereafter, try to negotiate a lower sales price (presuming the buyer remains interested in purchasing the property at the lower price) or alternatively exercise the right to terminate. The appraisal contingency often goes hand-in-hand with the financing contingency, if financing is involved, as the lender typically will not fund the loan if the appraised value is not equal to or greater than the buyer/borrowers sales price.
The Elias Law Firm can help
Please feel free to contact The Elias Law Firm at 305-823-2300 or via email at relias@eliaslaw.net if we can assist with any of your transactional legal needs.
About the Author: Robert Elias, Esq. leads a boutique law firm specializing in all aspects of residential and commercial real estate transactions, corporate law, banking, and asset protection/estate planning/probate. He is active in a variety of charitable and civic endeavors throughout South Florida and sits on the Board of Directors of Apollo Bank. Mr. Elias maintains an AV PreEminent Lawyer Rating from Martindale-Hubbell, the highest peer rating for professional excellence. Mr. Elias was named to the exclusive list of South Florida’s Top Rated Lawyers by American Lawyer Media.
For more on Robert Elias and Haute Lawyer, visit https://hauteliving.com/hautelawyer/.
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