Protective Clauses in the Purchase Contract
Contingencies are conditions included in the purchase offer that allow the Buyer to cancel the purchase without losing their earnest money or paying a penalty.
In a competitive market, homebuyers may be tempted to waive common contingencies in order to beat out other offers. This can be financially risky, however, so it’s essential that you consider the potential cost of waiving any contingency. Here are the most common contingencies in the Arizona purchase contract:
The inspection contingency gives the Buyer a “due diligence” period (usually 10 days) to determine condition of the home, or needed repairs. Based on the results of the inspections, the buyer can negotiate repairs or cancel the deal and walk away, receiving a refund of their earnest money deposit.
The inspection period is also an opportunity for the Buyer to complete any other “due diligence” related to the property. For example: review or verify permits for renovations; determine insurance requirements (i.e., flood insurance); verity square footage; review the septic tank inspection and certification if not connected to sewer; review governing documents of the Homeowner’s Association, to name a few.
Since your lender “pre-qualification” (or a “pre-approval”) is not a guarantee of loan approval, the finance contingency states the Buyer will be applying for a mortgage and offers the ability to walk away from the transaction if they are unable to secure financing.
While you may be confident that your home loan will be approved, there are situations beyond your control that can affect your ability to qualify. For example, a lender may deny financing if your income changes, or there are issues with the property’s title, appraised value, or condition. In these cases, the finance contingency may allow you to back out of the contract without any legal ramifications.
If you have a mortgage on another home, the finance contingency might also require you to sell that property to qualify for the new loan. In this case, your purchase would be contingent on two things: selling your home (see “home sale contingency” below) and getting financing.
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The appraisal contingency is part of the finance contingency, and requires the home to appraise for at least the purchase price. Cash buyers are not required to have an appraisal, but may choose to include this contingency and purchase an appraisal to reassure themselves about the home’s fair market value.
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Home Sale Contingency
One of the less common contingencies is a home sale contingency. This means that the purchase of a new home is contingent on the Buyer’s ability to sell their current home. It states that if the Buyer sells their home by a specific date, they will purchase the new property and the contract will move forward. If they don’t, then the contract is cancelled and earnest money returned to the Buyer.
In a competitive market, Sellers are far less likely to accept this contingency because there’s no guarantee that the Buyer’s home will sell in the agreed timeframe, causing the Seller to potentially miss out on non-contingent offers from other Buyers.
Other Protective Clauses
The Arizona purchase contract includes many additional protective clauses for Buyers, and they work much like other contingencies (they’re just not a obvious). Here’s a sampling:
- Clear Title: This can be one of the most important contingencies for you as the Buyer. This clause will allow the Buyer to exit the contract if the Seller cannot prove valid legal title to the property, or if the Seller is unable to provide clear or “unencumbered” title to the property, including an Owner’s Title Insurance Policy.
- HOA Regulations: If the property is located in a homeowners association, the HOA has 10 days from contract acceptance to provide the Buyer a copy of all governing documents (including CC&R’s, Bylaws, and financials); upon receipt, the Buyer has five days to review and cancel the contract if they disapprove of the HOA requirements.
- Seller Disclosures: Upon contract acceptance, Seller has 3 days to provide Buyer with the Seller’s Property Disclosure Statement, and 5 days to provide their Insurance Claims History for the past 5 years (less if owned fewer than 5 years). Buyers, in their sole discretion, can disapprove of the property based on any negative information contained in those disclosures.