Contingencies – Mortgage and Inspection
Contingencies in real estate transactions seem to be some of the most misunderstood and mishandled clause within the Pennsylvania Association of REALTORS® (PAR) standard form for the Agreement of Sale of Real Estate (ASR). Two of the most important contingencies for agents and their clients to properly understand are the Mortgage contingency and the various Inspection contingencies.
First, it is important to note that if a client elects to waive a contingency, i.e. a home inspection, the client can still make a request to the seller, through the list agent, to have the home inspected. It is the seller’s house, and the seller is free to refuse this request. But the client/buyer may ask nevertheless. Same with a mortgage or appraisal contingency. Just because they are waived does not mean the client cannot finance the transaction or have the home appraised, with seller approval.
Rather, by waiving the contingency, the client gives up their possible contractual right to terminate the ASR based on the results of said contingency. Example: client waives the home inspection contingency but decides to pay to have the home inspected nevertheless. Seller agrees to allow a home inspector access to the home. During the inspection, various concerning items are noted as they relate to the property. Client can decide to terminate the contract and walk away from the transaction; however, this would be a breach of contract and could possibly subject the client to damages, at a minimum, loss of the earnest money deposit.
Mortgage Contingency: it is important to make sure that the loan information is completed fully within the box of the contingency. This can protect buyers who may find that they could get some loan, but not the one they included in the contract. Failing to properly fill in loan information can affect a party’s right to unilaterally terminate a contract.
This leads to one of the bigger misunderstandings in the ASR – buyer termination. A buyer does not have a contractual right to terminate the contract if financing is refused or the mortgage terms are not met. Many agents think that their buyers should have that right, but they do not. Only the seller can unilaterally terminate, though the buyer can open discussions/negotiations with the seller if it seems like their financing is falling through.
Inspection Contingency: Over the last several years, it has become common for buyers to submit offers and waive the inspection contingencies. Thus, many agents have not had to negotiate over inspections and may have forgotten the key points in doing so. Specifically, it is important to make sure that a buyer has actually initialed the Elected or Waived box for each inspection in paragraph 12 of the ASR. This helps clear up any confusion and avoids unnecessary lawsuits or ethics complaints.
Further, buyers always have the explicit right to two pre-settlement walk throughs of the property prior to settlement. The purpose is simply to confirm that the property appears to be in the condition stated in the ASR. Importantly, these walk throughs are not waived simply because a buyer has waived their inspections.
One of the most common causes for real estate mediation is when a contract is terminated based on inspections and a buyer requests a return of the earnest money deposit. By properly completing the clauses in the ASR – specifically as they relate to contingencies – buyers and sellers alike can ensure that all of the terms of the ASR are clear and help reduce the number of mediations and disputes over the earnest money deposit return.
If you ever have questions on how to properly complete the PAR ASR, it is always best to check with your broker or your real estate attorney.
Resources:
- Pennsylvania Association of REALTORS® Standard Forms
- Pennsylvania Association of REALTORS® Legal Hotline
- Pennsylvania Association of REALTORS® Legal Resources
