Don’t buy without contingencies

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DEAR BENNY: I am in the midst of house hunting right now.

Do you have an example of contingency language for financing and inspections that you have used in the past? We are about to make an offer and would like to include this language in the contract if possible. —Ryan

DEAR RYAN: I am a firm  believer that if you plan to buy a house or a condo or house in a community association, your sales contract should contain three important contingencies.

A contingency means that if the matter is not resolved to your satisfaction, you have the absolute right to terminate the sales contract and get your earnest money deposit returned to you immediately.

The three contingencies:

(1) Contingent on the property being appraised at a minimum for the contract price. Why is this important? Let’s say your contract price is $300,000 and you plan to get an 80 percent loan in the amount of $240,000. You plan to put down your own money in the amount of $60,000.

But if the appraisal comes in low — as it is now happening around the country — say, at $275,000, your lender will lend you only $220,000. This means that you will need $20,000 more to close the deal.

(2) Contingent on financing. This is obvious. If you cannot get a mortgage loan, you want to have the contract declared null and void and get your deposit back

(3) Contingent on a satisfactory home inspection. You don’t want to buy the
property only to find out that a new roof is needed, or that the electricity is not up to par, or that the plumbing does not function properly. If your seller objects to such a contingency, run — do not walk — away from the deal.

I can’t really provide you with forms, since I do not provide specific legal advice in this column. However, I am sure that a local real estate agent or your attorney can craft the appropriate language for your specific situation. And although I have not looked, you might actually find sample language somewhere on the Internet.

DEAR BENNY: California’s statutes that address liquidated damages create a presumption that damages not exceeding
3 percent are reasonable.

If the buyer’s deposit exceeds that amount, then the burden of justifying that figure shifts to the seller. Is that true? —Steve

DEAR STEVE: I am not licensed to practice in the state of California and have not confirmed the information you provided. You claim that is the law in California, and thus most earnest deposits do not exceed 3 percent.

That may be the law in California, but I am a firm believer that sellers should get as high an earnest deposit as possible, at least 5 percent. Why? To make it clear to their prospective buyers that should they get buyer’s remorse and want to change their mind, they will lose that money.

Obviously, if they have contingencies that cannot be met, such as financing, appraisal or inspection, then they can cancel the contract and get their deposit back.

But all too often, just before closing (escrow) takes place, a buyer gets cold feet and wants out.

In my opinion, the seller should not be penalized. He will have to put the house back on the market, and he will have to pay his mortgage, taxes and insurance. He should be compensated by the errant buyer regardless of whether his out-of-pocket damages are over or under that 3 percent benchmark.

KASS is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to [email protected].