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What are the Contingencies in a Missouri Real Estate Contract?

I’ll say it: real estate transactions are complicated. You’re signing a million forms, splaying open your finances, coordinating your move (sometimes cross-country), talking to Realtors, lenders, inspectors, and title companies. There are countless moving parts and it’s imperative that your Realtor keep everything on track and, more importantly, on deadline. Contingencies are milestones set forth in the contract that allows a buyer to back out if certain conditions aren’t met in a timely fashion. These are mechanisms that protect the interests of both the buyer and the seller, preventing an instance where perhaps you get all the way to the closing table just to learn that the buyer can’t obtain financing to purchase the house. While several possible contingencies can be added, there are four main contingencies that come standard in a Missouri real estate contract.

  1. Title Contingency
  • At closing, the seller must transfer to the buyer “marketable title” to the property via a deed. Marketable title means that the ownership of the property is free and clear of any clouds, such as liens or other potential claims of ownership. Once you are under contract, a title company will conduct an examination of the title in order to issue a title insurance policy. If the title company discovers any clouds or defects on the title, this contingency allows the buyer to object to these conditions. The buyer may request that the seller clear up the issue prior to closing, or if they wish, the buyer may simply back out of the contract with their earnest money returned.
  1. Inspection Contingency
  • When a contract falls apart, home inspections are often the culprit. The contract allows a buyer to obtain professional inspections of the property in order to gain a better understanding of the home they are purchasing. If the inspections uncover any issues that are unacceptable to the buyer, the inspection contingency gives the buyer a couple of options. First, the buyer can choose to back out of the contract with their earnest money returned, though they still must pay for the cost of the inspection(s). Or, the buyer can request that the seller fix the issue. This opens up a negotiation window allowing the parties to go back and forth about what and how the seller will fix the problem, either through repairs or sometimes a closing cost credit or price reduction in lieu of repairs. If the parties can’t reach an agreement within the specified time period, the buyer may back out of the contract with their earnest money returned.
  1. Financing Contingency
  • The buyer is likely already pre-approved for a mortgage at the time their offer is written, but the real work begins once the contract is finalized. The buyer’s lender will get to work on securing the loan, which can include a formal loan application, credit report, appraisal (more on this later), pay stubs, tax returns, and more! If the lender discovers something that will prevent the buyer from obtaining a loan at the contracted purchase price, the financing contingency allows the buyer to terminate the contract with their earnest money returned.
  1. Appraisal Contingency
  • Though the buyer’s loan may depend on an appraisal, it is a separate contingency. In most cases, the buyer’s lender will require a formal appraisal to ensure that the property is worth the amount that it is being purchased for. If the appraisal reveals that the home is worth less than the contracted purchase price, the lender will only loan the buyer the appraised amount. Enter: appraisal contingency. In this scenario, the buyer has three options: terminate the contract with their earnest money returned, make up the difference between the appraised and contract prices in cash, or ask the seller to reduce the purchase price to the appraised amount. The buyer and seller can negotiate on the purchase price and if they fail to reach an agreement, the buyer may back out of the contract.

All of these contingencies are important safety tools in a real estate transaction, but they only exist within a timeframe. If a buyer slips up and misses a contingency deadline, they could forfeit their earnest money or worse: end up in litigation. Make sure you enlist a trusted, experienced Realtor to keep the transaction on track and get to the closing table on time.

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Thinking of Buying an Income Property in Columbia, Missouri?

There are tax consequences for that little cash cow

Real estate has always been, and will continue to be, one of the very best long-term investments you can make. By definition, an investment property is real estate purchased with the intention of earning a return on the investment, either through rental income, future resale, or both. An income property is a non-owner-occupied investment property (commercial or residential) bought for the purpose of generating passive income through rental activity.

A smart investment. Passive income. Sign me up, right?

Yes! But…

Before you start shopping for that little cash cow, you’ll need to educate yourself. Only then will you be able to decide if owning income property is a good fit for you.

  • Although many factors influence whether or not a particular property is a good ‘income investment,’ those that meet the “One Percent Rule” deserve a closer look. The rule simply states that one month’s rent should equal one percent or more of the purchase price (after any necessary repairs or improvements).
  • Generally speaking, you should limit your search to existing rental properties. This will enable you to verify rental history, vacancy rate, and operating costs before you buy. Also, check to make sure there is a current Certificate of Compliance on file (required by many municipalities, including the City of Columbia).
  • If you lack the cash to purchase the property outright, be aware that a mortgage for a non-owner-occupied property may carry a higher interest rate than one that’s owner-occupied. Lenders see it as a greater risk.
  • Beware of properties marketed as “under-rented,” meaning the market can bear a higher rental rate than that which is currently being collected. While there may be properties out there where this situation exists, they are generally under-rented for good reason! We have extensive local market knowledge and direct access to actual data to confirm or deny the seller’s claim.
  • Assuming the subject property meets the One Percent Rule, you’ll still need positive cash flow after satisfying the debt load (in the case of a mortgage) and operating expenses. If you don’t have the time or skills to manage the property, budget for the services of a property manager. Be aware that tenant emergency calls rarely come at convenient times!
  • Get sound professional advice upfront. An accountant can advise you with respect to the tax consequences of owning the property as an individual versus a legal entity, as well as recommend strategies for managing cash flow, deposits, etc. Hire an attorney to prepare (or at least review) the lease agreement and other tenancy documents you intend to use. It’s important to understand your rights, but also the rights of your tenants.
  • Give serious consideration to the length of time you plan on holding the property. Unlike the stock market, real estate transactions involve significant transaction costs (as a percentage of market value). Selling and buying property too frequently undermines your return.

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