So many people buy and sell homes every day that it’s easy to take a casual approach to signing a real estate contract. You have to sign the contract to get the house, so most buyers will sign without ever reading what they agree to. Even if the buyer has a conversation with their agent or attorney before signing, it is rare that they come away from that conversation knowing the terms they’ve agreed to.
With hundreds of different contracts floating around in the United States and each state having its laws, terms are thrown around in online resources all the time and not explained, so internet users may be under the impression they’re all referring to the same terms, which may not be the case. The details matter, and it’s worth it to slow down and take the time to understand those details, so you aren’t confused later when you’re required to follow through on your agreement.
The inspection Contingency is a common safeguard in a real estate sales contract, but they are not all the same. It is often said that if you have an inspection contingency, that you can walk away if you don’t like the inspection report. Is that what your contract says?
Some inspection contingencies do allow you to walk away for any reason – simply say “nope”, get your earnest money back, and that’s the end of it. Some have a restricted list of reasons you can walk away. This may be only major systems that must be operational, or some other list of items the seller agrees to repair if found. You may even have only a certain item that has to pass the test, such as structural members or a roof.
Once you’ve identified what items may be covered under your inspection contingencies, there is then the procedure required to execute it. This procedure can also vary. You may have a contract that allows you to submit a contract release “no questions asked” that the seller must honor.
There is also a possibility that your contract requires negotiation to be attempted. There are many states with contracts that include a right to remedy. The seller must be provided the opportunity to address concerns, accept or reject requests, repair or compensate for deficiencies. With these contracts, if the negotiations do not result in an agreement, It is usually up to the buyer to decide whether to move forward or “back out”.
Now we come to the dreaded due diligence clause. There are pros and cons to this type of agreement for both buyer and seller, and as of this writing the adopted South Carolina REALTOR’s contract includes this type of clause.
The due diligence clause allows you to check out anything and everything you want to investigate. From the roof, the crawlspace, the school system, feasibility of running a business from the home, zoning… ANYTHING. With this type of clause, you’ll have a certain period of time to put your purchase under a microscope. If you don’t like what you find you can terminate the agreement. In most cases (though not all) that termination will cost you. In South Carolina, North Carolina, and at least ten other states, this is your “inspection” contingency. The seller has taken his property out of “active” status so that you can do your due diligence. They’ve lost marketing traction and showings while you decide if you really want the home or not. If you decide that you’re done, the contract includes an amount of money that goes to the seller to compensate them for lost time and opportunity. This is typically “due diligence” money and is also typically a separate deposit from earnest money. Plenty of buyers are surprised by this because they aren’t reading their contract, so be careful what you agree to.
“I can back out and get my earnest money back” is a common belief among buyers, and it isn’t always the case. Read your contract carefully, not just the inspection or due diligence clause, but the entire text. In some states, your earnest money is promised back under certain conditions. In other, and this includes South Carolina, the earnest money deposit is only released to a party by mutual consent. Even if you have a common sense contractual legitimate reason to walk away, the buyer and seller have to agree to what happens to the earnest money. If they can’t come to an agreement, there are procedures that must be followed to pursue the deposit. This may include mediation in some states. In others, like South Carolina, this requires filing an interpleader and appearing before a magistrate to have them rule on who gets those funds.
Signing a real estate contract may be a common thing in our culture, but there is great legal liability in those pages. The inspection contingency or due diligence clause is only one of many points you’ll need to understand before you sign. Don’t be afraid to ask questions and, if necessary, consult an attorney before you bind yourself to an agreement
