In a market full of competitive home buyers who want to snag the home of their dreams, many are finding it nearly impossible to win a bidding war, no matter how many times they try. One tact some are turning to in desperation is to make an offer with few or zero contingencies. While this can be an effective strategy to set yourself apart from other bidders, there are serious financial risks involved. Here’s an explanation of the biggest ones. Make sure you understand the possible pitfalls before you waive any of these contingencies.
Waiving the Inspection Contingency
While a home may look great in a walk-through, you can’t be sure of the property’s working condition until all major components have been professionally inspected. We’re talking about the HVAC system, roofing, signs of water in the basement, electrical components, appliances, infestation, and more. Waiving this contingency means that you’re willing to take the house as is, despite any major defects, which could mean hundreds or thousands of dollars in remedy. You just don’t know what might be found until a professional inspection is performed. With the contingency in place, you may still have a chance to renegotiate price or have the seller make repairs.
Waiving the Financing Contingency
Lender preapproval is a necessary step to buying a home, but it isn’t a 100% guarantee that you’ll get the loan. With a financing contingency in place, you can cleanly walk away from the contract if you’re unable to obtain the financing to purchase. But if you waive this contingency, you’re stuck with the obligation to buy or else surrender whatever amount you put down in earnest money, which varies widely based on individual choice and local custom. This could be a very costly mistake.
Waiving the Appraisal Contingency
Every lender requires an appraisal before approving a home loan. They want to ensure that they’re not lending out more money than the home is worth. In current times, skyrocketing offers among competing buyers have led to many homes not appraising for their contract price. With the contingency in place, you can try to negotiate a lower price or walk away cleanly if the home appraises lower than expected. Without the appraisal contingency, you’re obligated to make up the difference in price out-of-pocket. Depending on the difference of the appraisal and purchase price, this could be several thousand to tens of thousands of dollars. If you can’t afford the difference, you’ll likely lose the home as well as whatever earnest money you put down with the offer.
Waiving the Home Sale Contingency
This contingency only applies to buyers who already own a home. Many people can’t afford to buy a home before they’ve sold their current one. This contingency allows time for the buyer to close on their own home sale and use the proceeds to close on the new one. Waiving this contingency means that either the buyer is already set to close on their own home or the buyer is willing and able to pay two mortgages simultaneously until their current home is sold. The risk lies in the home buyer’s ability to afford two mortgages, or their ability to quickly sell and close on their current home. This is one of the more popular contingencies being waived in the current market because sellers don’t want to wait on a buyer’s home sale if they have others willing to buy who don’t have the same need. Proceed carefully because things can go wrong. Your own home sale might fall through, leaving you without proceeds to buy the second home. Or, you may not secure the loan you thought you could get because you need to sell your current home first. Both circumstances could result in a loss of earnest money.
Summary
Waiving contingencies requires a thorough understanding of what you’re risking financially. Be sure to review the scenarios with your real estate agent as well as your lender before getting into the position of making an offer. Waiving contingencies can definitely be attractive to sellers when choosing among multiple buyers’ offers. But weigh the risks carefully as they pertain to your individual circumstances and stay within your level of comfort. No one should ever coerce you to take on a financially dangerous risk to win a bidding war.
Real Estate Term of the Week
Contingency: Refers to a clause in a real estate purchase agreement specifying an action or requirement that must be met so that the contract can become legally binding. Both the buyer and seller must agree to the terms of each contingency and sign the contract before it becomes binding. Contingency clauses provide a way for one or both parties to back out of a real estate contract if certain specified conditions are not met.