I Know I Signed a Contract, But What Are My 'Outs'?

Written by Posted On Thursday, 09 April 2015 07:00

There was an interesting article by Benny L. Kass in the daily RealtyTimes new s feed recently that covered the topic of when real estate sale contracts become binding.  You can read Benny’s article Here.


Benny is apparently from the Washington D.C. metropolitan area and the advice that he gives and contract that he references represent not only the legal side of things, but also the local real estate customs.

I suppose that some lawyers might argue that there is no such thing as a binding contract, just contracts that make it very onerous to cancel or get out of for cause. Locally (in Southeastern Michigan) almost all of the various Purchase Agreements (PAs) that I have seen from the companies that do business in this area are binding when both parties have signed the contract; however, all of them have several clauses that provide “outs” for the purchasers. Those are contingency clauses that specify certain things that the buyer must be happy with in order to proceed or which must at least have outcomes that are to the buyers’ satisfaction. Usually there are timeframes associated with each contingency during which the buyer must perform some inspection or test or complete other actions necessary to proceed to the closing. Perhaps calling then “outs” is a somewhat misleading term. They are not things that the Buyer actively looks for or uses to get out of the contract; but they are the contingencies that allow the Buyer to decide not to proceed with the deal and which allow the Buyer to get their earnest Money Deposit back in full. In most cases there are also provisions for the Seller to try to resolve any issues to the Buyers satisfaction. In every case there are also set timeframes within which things must occur. Failing to meet the deadline requirements is considered to be acceptance by both sides of the state of things “as is”.

The first big hurdle that the deal needs to get over is usually the home inspection, which in this area is typically required to be done within 7-10 days (sometimes less) after the Seller and Buyer have both accepted the Purchase Agreement. The wording on most home inspections clauses usually specifies how the Buyer is to express to the Seller his dissatisfaction with the findings and within what timeframe. Most PAs then give the Seller some opportunity at a retort to the Buyers issues. Some contracts, however, let the Buyer move right to declaring the contract null and void, based upon his dissatisfaction with the inspection. If the contract wording allows the Seller time to respond it is usually short and the response requires that the Seller tell the Buyer what he is offering to remediate the issues. That could be an offer to have the problems fixed to the Buyers satisfaction or to reduce the agreed upon sale price by an amount that would allow the Buyer to resolve the issues after closing (that would be called a Seller Concession).  Should the Buyer and Seller fail to come to a mutually acceptable agreement on the issues the Buyer will normally have the option to declare the agreement to be void and get their Earnest Money Deposit back in full.

The next big hurdle is normally the appraisal, which is a key part of the Buyer’s ability to get the mortgage that he needs to buy the place. The contract normally specifies a window within which the Buyer must make his formal application for the mortgage, usually within a similar timeline as is set for the inspection deadline. Once the Buyer has applied for the mortgage, the mortgage company will order the appraisal. Getting the appraisal scheduled can take a week or more, so about 2-3 weeks might pass from the time of acceptance of the contract until this appraisal actually takes place. The appraiser may take 3-5 days to get the report back through his management and into the hands of the mortgage company. If the Buyer gets one of those “Houston we have a problem” calls from his mortgage company another round of negotiations starts with the Seller.

The options for dealing with a low appraisal are that the Seller concede the difference between the strike price and the appraised value or the Buyer throws extra money into the deal to make up the difference or they reach some compromise in the middle.  Failing an acceptable compromise, most Purchase Agreements in this area would allow the Buyer to walk away from the deal and get his Earnest Money Deposit back. Appraisal issues have been the biggest cause of failed deals for the last couple of years, because the mortgage companies and the appraisers have been very conservative and have not kept up with the rising property values in the market.

Another part of the mortgage contingency language in Purchase Agreements also provides an “out” for the Buyer if the mortgage company turns down the mortgage, even if the house did appraise. OK, how can that happen? There are lots of things that can cause the underwriter at the mortgage company to turn down the mortgage, even if the mortgage originator (the mortgage agent that the Buyer was dealing with all along) thought that the Buyer was golden. Buyers can get a “Pre-Approval Letter” based on nothing more than the preliminary information that they give to the mortgage agent and a quick credit check.  Once the mortgage is actually applied for the file goes to the underwriter (that mysterious man behind the curtain) who begins an in-depth review of the deal and the Buyer. The Buyer is asked to provide all sorts of detailed financial information that wasn’t required initially and the devil is usually in those details.

The underwriter may look at up to two years’ worth of financial statements and tax returns (sometimes more), check on employment and review all recent credit purchases looking for any red flags that might indicate that the Buyer doesn’t have the wherewithal to carry this new debit load. Things like getting some money from mom and dad to make the down payment may seem to the Buyer to be his own business, but to the underwriter that is a red flag that must be explained and documented. Was it a gift or a loan? The underwriter also reviews the PA, the title work and any other documentation that may have a bearing on the deal; because his job is to protect the bank from undue risk.  This contingency, like the others in the PA, has a deadline; usually the mortgage must be approved (or denied) within 30-45 days from the date when all parties signed the deal. If the Buyer is turned down for the mortgage, most PA contracts contain provisions for the Buyer to back out of the deal and get his Earnest Money Deposit back.

There is another contingency written into most PAs that could occur between those two steps. When a real estate deal is signed one or both of the Realtors® involved will engage a title company to do the research on the title to the property to make sure that it can be passed to the Buyer at closing. Depending upon the office practices of those Realtors and t3he provisions within the PA, the title search could occur anywhere from a few days to a week or more after the PA is signed. The title search is done at the County Register of Deeds office and any and all recorded encumbrances upon the title are usually found. That may include recording for the sale of mineral rights (usually oil and gas), recordings of any tax liens against the property, recordings of any trades liens (sometimes called mechanics liens) against the property, all recorded easements for utilities, or access rights and any rights-of-way.

The “Title Commit” that comes back from the title company, based upon that search, gives a detailed list of any issues that were found or which need to be resolved in order to insure the title at closing. The PA language usually specifies both a deadline for getting title work done and to the Buyer for review and any objections, as well as provisions about how the Buyers objections must be expressed to the Seller.  Usually the Seller is given some timeframe to rectify any issues with the title that the Buyer has; however, if the issues cannot be rectified to the Buyers satisfaction, this is another “out” for the Buyer and he gets all of his Ernest Money Deposit back. Deals have fallen through because of issue with the encumbrances on the title that could not be resolved.

So, let’s assume that the Buyer has gotten through all of these things and was satisfied with each; is it now full steam ahead to closing and the Buyer is now locked in? Well, almost. There is one final “out” that the Buyer could end up using. That last hurdle is the final walk-through. Most contracts have a provision for the Buyer to walk through the house right before closing to be sure that the house is in substantially the same condition as the day that the offer was written and that the Seller has not damaged the house or removed items that were in the contract or considered to be a part of the house at the time of the offer. I have not had a deal fall apart at that late point, but I have heard of it happening. Sometimes Sellers do something stupid that dramatically changes the house as far as the Buyer is concerned and the Buyer is within his contractual rights to refuse to go through with the closing, if that is the case. Once again the Seller is usually given the opportunity to correct the issues.

If it seems like there are many places where the Buyer could back out and the deal fall apart, there are; however, in most deals both parties really want the deal to go to closing, so most of these “outs” are never used. The Buyer and Seller usually work out some compromise on any and all issues. It may be that the Seller makes repairs, offers price concessions, or corrects issue with the title or that both reach some agreement on how to handle the low appraisal. Most of the time, the sales go to closing.

There is one condition for which the Buyer really has no “out” and that is just getting cold feet and the last minute, sometimes called “buyer’s remorse”. This can occur for many different reasons and at any time, but it is usually after all other contingencies have been met and the closing is scheduled.  If, at that point, the Buyer has signed off on the home inspection and title work and been approved for the mortgage, he cannot just change his mind and back out, without consequences. No one can make the Buyer go through with the closing; however, at that point he will usually lose his Earnest Money Deposit, which will be given to the Seller (usually split between the Seller and his listing broker) as compensation for having taken his house off the market for the time that the deal was in-process.

If you are a Buyer, your Realtor should go over the Purchase Agreement with you in detail and explain all of these contingencies, so that you know what your rights are at every phase of the deal. If you are the Seller, you must understand that the Buyer has the right to back out of the deal and get his Earnest Money Deposit back if you cannot resolve these issues to his satisfaction. Most of the time the issues that come in a deal can be resolved and it makes no sense to blow the sale up and lose the Buyer over an issue that may have a relatively low price tag for resolution. If the home inspection finds Radon in your basement and you refuse to put in or pay for a Radon remediation system for $800, you have just bought your house back for that $800. Is it really worth it on a $200,000 to $300,000 sale? There may be some things that you just can’t fix or that you can’t offer a big enough price concession to overcome and the deal will fall apart. You’ll have to resolve those issues before you get another buyer, one way or another, because they will come up again. As the Seller, you have no ”outs” on those issues.

Hopefully, as either a Buyer or Seller, you now better understand the contingencies that may be within a real estate Purchase Agreement. Whichever side you are on, read that PA carefully before you sign and know your obligations and your outs.

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Norm Werner

Norm Werner is a Realtor at the Milford office of Real Estate One serving the southeastern Michigan area of Oakland and Livingston Counties. Norm specializes in residential real estate. Norm lives and works in Milford Michigan and is married to Carolyn Werner. Norm and Carolyn live in a historic home just three blocks from downtown Milford, with their two dogs - Sadie and Skippy. Norm specializes in the historic homes of Milford and the surrounding area and is on the Board of Directors of the Milford Historical Society. Norm especially enjoys working with first time buyers and those at the other end of the real estate spectrum who are downsizing into their retirement home. 

In addition to his Movetomilford.com web site, Norm also owns and m,aintains TheMilfordTeam.com web site, the HuronValleyRealtor.com web site. He is also the webmaster for and the MilfordHistory.org web site and the MilfordCar Show.com web site, as well as his church web site - Spiritdrivenchurch.com. In addition to blogging about real eastate, Norm has a personal blog - NormsMilfordBlog.com - on which he shares inspirational messages and the occasions personal observation about life. 


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