Word of the day
If a contingency is worded too loosely, such as “contingent on my deciding whether it is a good deal or not,” then the entire contract is considered “illusory” and unenforceable by either party due to lack of “mutuality of obligation.” If the sale is contingent on a “satisfactory” inspection or attorney’s review of lease, the courts will try to impose standards of good faith and reasonability so a party cannot back out just because of a change in that party’s plans.
A contingent sale is different from an option. In an option, the optionee has absolute discretion whether to exercise the option. In a contingency, the buyer must buy upon the occurrence or nonoccurrence of a specified event, such as loan qualification.
The financing contingency is not only the most frequently used contingency, it is also the most controversial. Even a well-written contingency statement can cause problems. For instance, assume that a financing contingency stated that the offer was contingent upon buyer obtaining a first mortgage loan commitment for $167,500 with interest not to exceed 5 percent per annum and for a term of not less than 30 years, and monthly payments for principal and interest not to exceed $800.18 plus ¹⁄₁₂ the estimated annual real property taxes and ¹⁄₁₂ the annual insurance premium. Buyers agreed to use good faith and due diligence in obtaining such a loan. Buyers qualified for the loan but refused to take it because the lender added an interest rate escalation clause. Even though a court might allow some deviation in the financing commitment, the inclusion of an escalation clause is a material deviation of the terms of the offer to purchase and thus the buyer would not be in breach of the contract for refusing to complete the purchase; the buyer is entitled to a return of the deposit money. However, a buyer who did qualify for financing on the terms stated in an offer but who later gets divorced or otherwise changes circumstances so as to not be qualified at the time of closing may have difficulty defending a lawsuit for enforcement of the purchase contract. Sometimes, a cautious seller might add a clause to the effect that “the execution of any loan documents by the buyer shall be deemed to be an acceptance of such loan and a waiver of this contingency.”
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