Contract Contingencies Should be Detailed in Writing

"Contingent on what?"

That's the title of a recent article by real estate regulatory agencies in Alaska and Colorado. Let's share this good advice with you, the consumer.

The agencies say that contingencies in a purchase contract are a common source of complaints. That is no surprise: buyers, sellers and their agents are not writers by trade.

Take a few extra minutes to think through any contingencies in a contract. When everyone fully understands the contingency it will be easier to write it down.

Consider the simple example of a well test. The buyer expresses concern about the well and wants it tested. He is willing to make an offer subject to well testing.

Don't let it go at that. Language in the contract that says "subject to well testing" leaves too much room for misunderstanding.

Who is going to test the well? Who chooses the tester? What is the tester going to test? Who pays?

By what standard will the buyer judge the test? If the well meets the Municipality's standards, will that be sufficient? Must the well produce to the higher standard that FHA requires?

What about water quality? The Municipality doesn't care about some silt in the water, but if the buyer won't buy the house if the toilets turn brown, the seller needs to know that.

How much time will the parties allow for testing? Agree on a specific day and hour instead of "15 days from contract signing."

How does the buyer communicate to the seller that the test results are unacceptable? What happens next? Can the buyer just walk? Does the seller have the opportunity to correct a deficiency? Does the buyer have an obligation to negotiate in good faith?

These questions ask whether the contingency is really just a back out clause that gives the buyer a free look at the property. For instance, if the seller would agree to install a filter that takes care of the silt problem and the buyer can walk anyway, the contingency is a back out clause.

Where the contingency is a back out clause the seller might  reserve the right to continue to market the property until the buyer removes the contingency. What if the seller gets another offer? Can the seller terminate the first contract? If so, what notice does the seller give? Does the seller market the property with the understanding that the first buyer has the right to the property during the contingency period but may accept a backup offer?

Disputes over disposition of earnest money in a contract gone sour are common. Buyers and sellers cancel agreements when one or both don't remove contingencies. So when writing a contingency, have an effective method in place to resolve the earnest money question.

What the parties agree isn't as important as the need to have an agreement. The most simple formula is to agree that the buyer automatically gets all the earnest money back but the seller can continue to market the property and cancel the buyer's contract with short notice if the buyer has not removed the contingency.

Sellers tend to be quick to ask for earnest money even though the buyer has caused only minimal damage. If the damage is only disappointment that matters didn't work out as hoped, that may not be worth going to court.

By contrast, it is understandable to ask for earnest money, and perhaps specific performance, if a buyer gets cold feet after persuading a seller to take a property off the market for weeks on end and tries to use an unfulfilled contingency as the excuse.

Most contingencies are about property condition. Remember Alaska's strict property disclosure requirements. When a buyer gives a seller adverse information after inspecting a property, that information becomes public for the next buyer if the first one backs out.

The Alaska seller's nightmare is the buyer who hires an enthusiastic but ill-informed inspector whose report is alarmist, with conclusions that others might debate. The buyer backs out, giving the seller a copy of the report.

The seller now has to give it to the next buyer, raising predictable concerns. The only defense, where the conclusions are questionable, is to have the seller obtain a report that expresses a contrary point of view.

The answer is not to refuse to allow an inspection contingency. Better a nervous buyer backs out, than complains after closing about a defect, real or imagined.