If you’re selling a house in California, prepare to be buried under a mountain of paperwork. The state has some of the most complex real estate laws in the country.
That’s why it’s one of only three states to have full-time, professional regulators overseeing the real estate brokerage marketplace.
With all of the legal requirements for sellers—including a lengthy disclosure process—there’s one piece of paper you need to make sure your real estate agent is staying on top of: the contingency removal form.
Read on to find out exactly what it is, why you need it, and how to follow the rules so that your home sale stays on track.
What is a contingency, and why does CA require a form for it?
“In California, a contingency is a protection for the buyer that allows them to back out for virtually any reason during a set time period. It’s basically the buyer’s right to be able to back out without any repercussions,” explains Aaron West, a top Modesto, California agent with 14 years of experience.
While real estate deals across the U.S. can include contingencies, California is the only state where you need to complete a contingency removal form in order to lift the contingency restraints so that the sale can move forward and close.
What are the different contingencies removed by the form?
There are three primary contingencies that are built into a real estate contract.
- The home inspection contingency, which allows the buyer a set timeframe to have the house inspected to ensure it’s in acceptable physical condition.
- The appraisal contingency, which allows the buyer to back out if the house appraises for less than the agreed-upon value.
- The third is the loan contingency, which lets the buyer back out if they can’t get their loan approved.
“A lot of buyers in California are approved, but not underwritten, by their lenders until there’s a deal on the table,” explains West.
“The loan contingency gives the lender 21 days to go through the buyer’s financials with a fine-tooth comb to make sure that all provided information checks out.”
There is a fourth contingency that’s often, but not always, included in many contracts, and that’s the contingency for sale.
Essentially, for homeowners who are looking to buy at the same time that they’re selling their own home, this contingency allows them to write an offer on your house that is contingent on their ability to close on their own home sale.
If their previous home doesn’t sell before their deal to purchase your home is set to close, the buyer can back out.
When is the contingency removal form used?
“The contingency removal form may be used three or four times during a sale, depending on how many contingencies there are and what the time periods are when the buyer needs to sign off on those contingencies,” says West.
“Once the buyer has signed a contingency and it is received by the listing agent, then that contingency has been removed. There is no need for a mutual signing by the seller for this particular form to be a part of the contract.”
Who is responsible for completing the contingency removal forms?
In most cases, these forms are used to remove a buyer’s contingencies—so it’s the buyer’s responsibility to complete the form.
However, removing contingencies helps out the seller, not the buyer. So your buyer’s agent has no motivation to get these forms completed in a timely manner.
That’s why sellers need their agents to stay on top of the contingency deadlines to make sure the buyer completes the contingency removal forms on time.
“Agents looking out for the seller’s best interest want the buyer’s contingencies removed as quickly as possible, because the buyer is now committed to the property once they’re removed,” says West.
“If the buyer backs out after those contingencies have been removed, their good faith deposit could be at risk. So, as a protection to the seller, the contingency removal form makes sure that the buyer adheres to the timelines that have been set forth in the contract.”
Unfortunately, too many seller’s agents don’t (or don’t know to) ask the buyer’s agents to complete these forms throughout the home sale process.
Requests for these forms happen infrequently enough that many buyer’s agents don’t know how to complete the forms correctly.
Does the seller ever need to complete a contingency removal form?
The contingency removal form is actually designed to cover the removal of both buyer and seller contingencies.
The first section of the form focuses on contingencies that allow the buyer to back out.
The second section deals with the seller’s removal of a seller contingency. However, this doesn’t come into play very often.
“Normally, a seller doesn’t have contingencies letting them back out of the contract,” explains West.
“The only scenario that really comes up is if the seller is buying another property, the seller can add a contingency that the sale is contingent on them finding or closing on a replacement property.”
When this seller contingency is added to the contract, it allows the homeowner to back out of the deal for reasons like, relocation plans falling through, or if the seller can’t find or close on a new home before the sale of their current residence closes.
As long as the seller contingency is in place, the homeowner can cancel the escrow and kill the deal, leaving the buyer with no recourse to move the contract forward.
What are the 17- and 21-day rules of the contingency removal form?
There are two hard and fast deadlines within the buyer’s contingencies that work to benefit the seller.
“Depending on your area, there’s typically a customary period of 17 days for inspections, and then 21 days for the loan and appraisal contingencies,” explains West.
So, once you’ve accepted your buyer’s offer and the contracts have been signed on the dotted line, the seller then has 17 days to have a home inspection completed. Typically, once the inspection is done, your buyer will have a list of repair requests that can then be negotiated.
The 21-day loan and appraisal deadline allows time for the buyer’s lender to both verify the buyer’s borrowing power and have your home’s value appraised so that the loan amount can be approved.
What happens if the forms aren’t signed by the buyer by these deadlines?
Just because these deadlines are standard, doesn’t mean that the contingencies automatically drop off.
“In California, the buyer must physically sign the form to remove the contingency. As long as the contingency removal forms remain unsigned by the buyer, those contingencies continue in perpetuity,” explains West.
“When that happens, the buyer can even cancel the sale with no penalty, and no recourse for the seller—even if it’s just a day or two before the close of escrow. So as a seller, it’s really important that your agent is very proactive in getting the forms signed as soon as possible.”
Since completing the contingency removal forms offer no benefit to the buyer, it may be difficult to get them signed.
Luckily, there’s a form that your agent can use to motivate your buyer’s agent to complete them. It’s called the Notice to Buyer to Perform (NBP).
Once your agent delivers the NBP, you buyer then has two days to complete the contingency removal form or you can cancel the contract without penalty or buyer recourse.
Can a buyer refuse to sign off on the contingency removal forms?
Once you serve your buyer with an NBP, they cannot refuse to complete the contingency removal forms without canceling the sale.
However, that doesn’t mean they’ll sign off on the forms without asking for something in return. Most buyers include request for repairs as a condition of signing the contingency removal forms.
“We’re in the middle of negotiating one right now and my clients were asked for $4,000 worth of repairs,” says West.
“We’ve negotiated it down to $2,500, but for it to be part of the contract, the buyer has to sign off to remove their contingencies. If the buyer agrees, they’re obligated to remove their contingencies so that the agreement to make $2,500 in repairs becomes part of the contract.”
Is there any way to sell a house in California without buyer contingencies?
As a seller, you can’t remove buyer contingencies from your home sale contract without expecting or getting pushback from your buyer.
However, if you’re selling in a hot market with fierce bidding wars for the few homes available for sale, then buyers may agree to skip the typical buyer contingencies in an effort to entice you to accept their offer.
“Buyers who forego contingencies as part of their offer are basically saying that they’re willing to put their good faith deposit at risk immediately,” says West.
“For sellers, the attraction of those offers is that they can shorten the sale period, because you don’t have those 17- and 21-day holding patterns, and they don’t need to worry about the buyer getting cold feet and backing out.”
Does California use any other special forms for real estate transactions?
The contingency removal form is far from the only real estate contract document that’s unique to California.
“We live in the United States of California, so we have more forms and disclosures than in any other state,” says West.
“That’s one of the reasons why you need to work with an experienced, professional agent. That can make a huge difference in just how smoothly your sale goes and how protected you are from an unscrupulous buyer who might try to bring a California-allowed lawsuit against you.”
How do contingencies work in other states where there is no form?
If you aren’t buying or selling property in California, you don’t need to worry about completing forms in order to remove any contingencies in your home sale contract.
“Contingency removal forms are used exclusively in California. With most states, contingencies are either automatically removed after the set time period passes, or there just aren’t any contingencies,” explains West.
Keeping tabs on contingency removal forms
All the paperwork required to buy or sell real estate in California can get so overwhelming that the state’s Department of Real Estate has published a Surviving Escrow in California guide.
The contingency removal form only gets one small mention, but it’s a minor piece of paperwork that can cause some major problems for your home sale if it’s not completed at the appropriate stages.
So do yourself a favor, and hire an experienced California agent who’ll make sure your home sale’s contingencies are removed right on time.
Header Image Source: (Abbie Bernet/ Unsplash)