2004 has barely begun, and the real estate market is already heating up in some areas. But, where listing inventories are low, some buyers are once again finding themselves in competition with other buyers.
A competitive real estate market can lead to risky real estate practices. For instance, contract contingencies, which are designed to protect buyers during the home-purchase process, tend not to be used as often. Buyers simplify their offers to make them more appealing to sellers. In some cases, contingencies are left out of the contract completely.
From the seller’s standpoint, what could be better than an offer that’s contingency-free? Not a thing, if the transaction closes. But before you jump at a contingency-free offer, make sure that you and the buyers understand the consequences of waiving contingencies.
For example, some buyers feel confident about making an offer without a financing contingency. This is particularly so if the buyers have been preapproved. A preapproved buyer has been lender-approved for a mortgage.
However, in order for the lender to issue a final loan approval, the property that the buyer wants to buy must be acceptable to the lender. This usually involves an appraisal and title search. If the buyer waives the financing contingency, but the property doesn’t pass muster with the lender, you might not be able to close the deal.
What are the consequences for the buyers? They could lose their deposit money if the transaction doesn’t close. If the contract had included a financing contingency, and the lender denied the loan, the buyers’ deposit probably would have been returned to them.
From the seller’s standpoint, you may think the consequences aren’t too bad. Depending on the terms of the contract, the sellers might be able to keep the buyers’ deposit. This could be used to offset additional expenses. But, it may do little to alleviate the inconvenience of having to resell the property. Suppose you moved out of your home based on the contingency-free offer. To resell it, you might have to move back in, or pay a decorator to stage the property at considerable expense. If you went ahead and purchased another home because yours was sold with no contingencies, you could find yourself in an uncomfortable financial bind.
Sellers love offers that don’t have an inspection contingency. This is because inspection issues tend to be the most common reason home sale transactions fall apart. However, an offer without an inspection contingency can cause problems for both buyers and sellers.
One seller had a deal fall apart because the buyers had second thoughts about waiving the inspection contingency. Even though the contract didn’t include an inspection contingency, the buyers went ahead and had the home inspected after their offer was accepted. Then they backed out based on the findings. Another seller was sued because of inspection-related issues that surfaced after closing. These issues would have come up before closing had the buyers taken the time to have the property properly inspected. A well-inspected property provides protection to both the buyer and seller.
Buyers, who buy a property without the benefit of contingencies, could increase their financial liability. For example, if you’re going to make an offer without an appraisal contingency, and the property appraises for less than the purchase price, you may need to make up the difference in cash or risk losing your deposit.
THE CLOSING: Before accepting offer without an appraisal contingency, the sellers should find out if the buyer is willing and able to increase their cash down payment if necessary.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers,” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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