Recently, six buyers competed to buy the same house in Piedmont, Calif. Four of them had lost out in previous multiple-offer competitions. Two decided that nothing was going to stand in their way this time, so they made contingency-free offers.
In areas where demand for listings is high and inventory is low, buyers will compete not only on price but also on terms. The winner is often the buyer who offers the highest price, the quickest close and the fewest contingencies. A contingency protects buyers if they need to satisfy a condition – like arranging financing – for the sale to go through.
For example, let’s say you have a house that you must sell in order to buy another one. You make your offer on the new home contingent on the sale of the old one within 30 days. If on day 30, you haven’t sold your home, you can withdraw from the contract without penalty. The contingency protects you from losing your deposit if your home doesn’t sell.
On the other hand, suppose you make an offer that is not contingent on the sale of your home because you have already lined up a buyer for it. If that buyer backs out and you can’t close on the new home, your deposit could be at risk because you aren’t protected by a contingency. Deposit amounts vary. In California, they often equal 3 percent of the purchase price, or $15,000 on a $500,000 price.
The most common home purchase contingencies are for the buyers’ loan approval, property appraisal and inspection, and satisfactory review of the title record. It’s risky to make an offer to buy a home without these contingencies unless those conditions have already been satisfied.
In hot markets, many buyers feel pressure to waive contingencies that they would otherwise include in their offer. Before waiving a contingency, make sure you understand the potential consequences, and take steps to minimize risk.
Buyers who are preapproved for financing often think there’s no reason to include a loan contingency in the contract. However, a preapproval is usually subject to the lender’s satisfactory review of the title record and approval of an appraisal of the property. If either is not satisfactory, and you have to back out of the contract because the lender won’t give you the financing you need, you could lose your deposit.
HOUSE HUNTING TIP: Buyers who make offers without an appraisal contingency risk losing their deposit if they back out because the property appraised for less than the purchase price. One way to minimize the risk is to ask your loan agent or mortgage broker to contact the appraiser and ask him to drive by the property and review the comparable sales before you make an offer. What you want to know is if the appraiser sees any reason why the property won’t appraise for the price you’re offering.
Some buyers waive their right to inspect the property in order to be competitive. This is risky because you could end up paying far more than the purchase price if the property needs a lot of work. If you buy without an inspection contingency, be sure to have inspections done before you make an offer. Otherwise, you could end up short of cash if you find out after closing that a big-ticket item, such as the roof, needs to be replaced.
Read the purchase contract carefully before you sign it so that you understand what you’re giving up if you decide not to include contingencies, as well the penalties you might incur if you do back out for a reason that’s not permitted in the contract.
THE CLOSING: Consult with a knowledgeable real estate attorney if you have any questions.
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.
What’s your opinion? Send your Letter to the Editor to firstname.lastname@example.org.