What is a coronavirus contingency clause?
The coronavirus has disrupted our day-to-day lives in innumerable ways, and it’s had an even bigger impact on important milestones such as graduations, weddings, and buying a home. While people looking to purchase a home right now might enjoy lower interest rates (mortgage rates have dropped to historic lows), they also need to consider job uncertainty, stricter financial scrutiny, and even practical considerations like how to handle closing while adhering to social distancing and shelter-in-place mandates. In order to ease the homebuying process during a pandemic, some states are working in a contingency clause specifically for the coronavirus.
“The coronavirus clause in real estate is a new addendum that can be attached to a purchase agreement preparing both the buyer and seller for potential delays,” says Seattle-area licensed Realtor and home insurance specialist Robyn Flint. Examples include delays caused by shut-downs and extensions to current social distancing policies. Flint says:
"The COVID-19 addendum protects both buyers and sellers from following through with the purchase if they are put under quarantine for the suspected virus or receive a diagnosis. It allows for an extended closing date with the clause for termination if the purchase fails to close within that extended closing date."
In addition to protecting all parties involved due to infection, the addendum also protects them in the event of job loss due to coronavirus.
Laws Vary By State
Still, not all states offer a specific coronavirus clause. In Realtor Lindsey Martin’s experience, the bulk of the homebuying process has largely been business as usual since her operating state of South Carolina doesn’t allow people to back out of a transaction “unless it has impacted their loan qualification.” Martin shares:
“One thing we've had to monitor closely is home sales that are contingent upon the successful closing of the buyer's exit home in another state. State-to-state real estate laws vary, and a client's ability to back out of a purchase agreement with a home in another state would hinder the sale of our client's home here."
In Florida, where natural disasters are common, Florida-based broker Chris McDermott says a commonly used real estate contract includes a Force Majeure section, which allows for an automatic extension of the contract for up to 30 days if the buyer or seller cannot close because an event (such as a hurricane, a flood, or extreme weather) is causing the availability of services essential to closing to be disrupted, delayed, or prevented.
“If this goes on after 30 days,” he says, “either party can terminate the contract by giving written notice.” In some states, similar Force Majeure sections include verbiage related to epidemics, but McDermott says that’s not the case in Florida. “Given these unprecedented times and that this concept is a bit abstract, it’s not clear if COVID-19 falls under the definition [in Florida] or if it does not,” he says.
Closing at a Distance
In addition, Lindsay Martin says she’s seen subtle differences in the process since the pandemic began, particularly when it comes to closing. Martin says:
“The main change we've seen is how people are choosing to close. To limit risk of exposure, most are not going into the attorney's office to sign their closing paperwork as they normally would, but rather are having the closing attorney act as a Power of Attorney for their home closing. All documents are being reviewed over phone and email rather than in person, and we’ve been lucky enough to not see significant delays in closing or any lending issues.”
In Ohio, Columbus-area Realtor James Culwell has seen other ways people have gotten creative with the closing process, noting that in his state where closings typically take 30-45 days, it’s now closer to 45-60 days.
“Title companies are doing closings in a safe manner and giving parties options on how they want to do it,” Culwell says. “One option is even ‘curbside closings,’ where the parties stay in their car, and the title representative comes out to the car for signatures.”
Allow Extra Time
McDermott says that in his experience in his state, closings have been pushed back about 15 days on average, similar to Ohio. “Closings are taking longer, given some appraisals have been delayed due to stay-at-home orders,” McDermot says. “Lenders are also experiencing delayed turn times for underwriting and issues like reverification of employment.”
Robyn Flint also points out that closing dates are being pushed back due to a delay in titles being issued—title companies are closing or shifting to work-from-home, and some counties don’t allow digital documents. Only 2,100 counties out of the 3,141 counties/parishes in the U.S. provide some electronic access to their property records, according to CNBC.
Another piece of the homebuying process, Certificates of Continued Occupancy—which are required in many places across the country (specifically the northeast) to close on a home—are also causing delays. This certificate ensures that the home has been inspected and is up to code.
“Right now, with many local governments closed and with the inspectors themselves not willing to go into the home, this has been paused. I think one thing people are doing to get around that is they have addendum [to the purchase agreement] where they retroactively get [the certificate],” says Jennifer Gralitzer, a New Jersey-based Neighborhoods.com agent. “The only problem is that that inspection could turn up things that are not up to code, so you could potentially be taking ownership of a property that may have safety issues. It’s at the risk of the buyer.”
Generally speaking, there are still many unknowns in terms of real estate and the coronavirus, says Than Merrill, real estate investor and CEO of FortuneBuilders, a real estate education company. Merrill says:
“The country has been in a holding pattern for roughly one month, which is only beginning to shed light on how long real estate closing may be extended. In the meantime, banks have been proactive in anticipating future delays—many U.S. banking regulators have already granted lenders more time to conduct every step of the closing process, and regulators have announced that they will extend the window to 120 days for lenders to conduct things like appraisals. That’s not to say lenders expect closings to take an additional 120 days, but rather they do expect a bottleneck of pent-up demand to delay the closing process for many Americans.”
So-called coronavirus clauses vary from state to state, but Merrill expects states will exceedingly add exceptions to their contracts to give buyers and sellers more confidence.
“While many contingencies may not mention the virus by name, the financial hardships ushered in by the current pandemic may enable some homebuyers to remove themselves from a deal,” Merrill says. “Instead of risking losing out on future transactions, implementing [coronavirus-related] addenda should stimulate more purchases moving forward.”