How to Protect Yourself When Waiving Homebuyer Contingencies
As the East Bay real estate market grows more competitive, bidding wars have become commonplace. While the price is often the primary consideration, it’s not uncommon that a seller takes a lower offer that they feel has a higher chance of closing. So, aside from paying more money for a home or taking out a larger mortgage, how can a buyer make their offer more competitive? Many homebuyers have started waiving contract contingencies to strengthen their offer. The typical purchase agreement used by the majority of California Realtors and their clients has three primary contingencies that may be negotiated.
These contingencies are like buyer escape hatches. They allow a buyer to cancel the contract or renegotiate if there is an unforeseen event or circumstance. If the buyer cancels in a way permitted by the contingency, they will retain their initial deposit (typically 3% of the purchase price) submitted to the escrow holder right after the offer was accepted. Conversely, if the buyer removes all contingencies and then cancels the contract, the seller may be able to claim the buyer’s initial deposit.
First, let’s talk about the inspection contingency - In my experience, this is the contingency that sellers are most worried about. Once your offer is accepted, the inspection contingency gives you a certain amount of days to perform inspections. Should you find further issues with the property, you can use the contingency to cancel the contract or renegotiate the purchase price. A buyer can apply this contingency in numerous ways. Several years ago, when representing a seller client, after we accepted a buyer’s offer, they canceled the contract a few days later because they didn’t like the way the light came into the living room in the morning. While you would think that a buyer would have considered this before going through the trouble of writing an offer and submitting their deposit, it just goes to show the range of options the inspection contingency allows. This scenario also spotlights why having an inspection contingency makes your offer less competitive in the seller's eyes. So how do you protect yourself when waiving an inspection contingency? You will want to start by reading through the disclosure package. Depending on where you’re looking for a home, there will be varying degrees of disclosure. Typically, in the East Bay, a seller will provide a home inspection report and a structural pest inspection report. Homes that are located in seismically active areas might also include a structural engineer’s report. A thorough read of these reports should answer most questions about property condition, but it’s never a bad idea to hire your own inspector to do a pre-inspection and give you their thoughts on the condition. Hiring an inspector before submitting your offer is risky in that if another bidder gets the property instead of you, there is no refund for the inspection cost. However, it may give you the confidence needed to write your offer without an inspection contingency.
Now let’s discuss the appraisal contingency - If you are using a mortgage to buy your home, the bank will have an appraiser go to the property, take measurements, note the updates and finishes, and then produce a report comparing a home to other recent sales in the area. They do all of this to determine whether the bank is making a prudent decision about how much money they should lend to the potential buyer. If the appraiser determines that the buyer’s offered price is greater than their opinion of value, the bank will reduce the amount they are willing to lend the buyer to purchase the home. If you have an appraisal contingency, you can ask the seller to participate in the appraisal shortfall by lowering the price; if they refuse, you can choose to cancel the contract. If you waive the appraisal contingency, you agree to pay any difference between the appraisal value and the offered price as a higher down payment. If you have extra cash that you are willing to put into the home and have a smaller mortgage, you may feel comfortable waiving this contingency. You can often weigh the risk of waiving an appraisal contingency by asking your agent to produce a comparable market analysis report to review with you before making your offer. This analysis will include the same comparable sales that the appraiser will be reviewing. If there are many home sales nearby the home you are interested in with similar characteristics sold above the price point you’re offering, then it is less likely that the appraisal will come in below the offered price.
Finally, we will talk about the loan contingency. This is the contingency that allows you to cancel the contract if your lender decides they cannot provide you with a mortgage after your offer is accepted. If a reputable lender preapproves you and you are truthful in your loan application, it is unlikely that your loan will later get declined. Your lender will likely advise you that you cannot take out new financing, make large purchases, or change your employment when you are in contract to buy a property. These are big changes that affect your financial profile and loan qualifying. Some lenders also offer pre-underwriting to have the underwriter review all of your financials and issue you a loan approval only pending a satisfactory appraisal report. In this way, you can be more confident that your loan will be approved and have less need for a loan contingency.
While this article will give you a better understanding of the process and the dynamics at play, always make sure to consult your realtor. The above information is based on my experience, having sold hundreds of homes in the East Bay. Still, different areas have different local dynamics and procedures that can only be learned and mastered through repetition and dedication.
If you have any questions or if you would like to discuss your home search further, always feel free to get in touch!