To Have or Forgo Contingencies When Buying a Home

By
Real Estate Agent with RE/MAX Star Properties BRE#01124318 & 01174047

To Have or Forgo Contingencies When Buying a Home

Unasked3

So, contingencies, yes--well as agents, we love them because they help insulate us from future lawsuits. But as a buyer, they can cost you money and they will most certainly cost you a home or two in a competitive market. Here's why. Faced with a multiple offer situation on a property, buyers will often try and make their offer stand out above their competition. And there are two ways to do that--the terms they offer and the price they pay.

In a multiple offer situation, buyers often exceed the asking price and offer terms that are exceptionally attractive to the sellers. Many offers will contain no contingencies for any inspections, loans or appraisals. They'll purchase the home in its present condition and forgo asking for any repairs. At times they'll even let the seller rent their home back for awhile while they relocate.

On the flip side, some buyers despite the fierce competition for a property are unwilling to waive having contingencies. Here's why this can hurt their position: Let's say for example that a seller has already performed inspections at their cost with reputable inspectors, yet a buyer wants a seven day contingency to have more inspections from what could be not so authoritative or reputable inspectors. This causes many sellers to be leery and it could put the seller in the position of getting poorly done reports which they would then need to turn over to any other prospective buyer.

Of course they would also have to go out and try and refute any erroneous or exaggerated claims in the reports which might take two more professional opinions before being seen as credible. That's a lot of wasted time, money and effort and could taint the home in the meantime. So if a buyer is comfortable (as they can be) enough to move forward with the inspections on hand, they have an upper hand.

Case in point, say a seller receives an offer for $1,000,000 with no contingencies and one for $1,010,000 with ten days for inspections and loan contingencies. They'll very likely take the offer for $10,000 less with a better guarantee of a sure sale. What that means is if your offer contains contingencies, you may have to offer significantly more to garner the seller’s attention--say $20,000. What you effectively have done then is spend $20,000 just to have another opinion, not to mention the added cost of another inspection--$20,000 that could be better spent on improvements that increase the value of your home, or put towards any issue that might be found later. Alternativly, the seller may simply ask the non-contingent buyer to meet your price and you’re out of a home.

Now with all that said there are times when not having another inspection would be reckless and of course we'd admonish anyone against doing so if that were the case.

As for loan contingencies, this is why it is important to know that you are pre-approved for the price you are offering. You can also always "double app" which is a term for applying with more than one lending institution to make sure you have a fallback plan. If you get two lenders to agree that your loan will not be an issue then you might feel comfortable enough to not have a contingency for a loan.

Appraisal contingencies run along the same lines. If the home you are buying does not appraise with a particular lender at the value you offered, since the lender will only lend on 80% of the appraised value, you would need to make up any difference, or go with lender #2 and try and get a better appraisal. There's risk of course, but if you're sure you could make up any shortfall, you just mitigated that risk.

We have never had a buyer lose their earnest money security deposit over qualifying [or anything else]. So albeit that risk exists, it's limited to your earnest money deposit and furthermore diminished but the odds that you'll probably never even have to deal with a bad appraisal.

In today’s competitive market environment, it’s difficult to secure a home if your offer contains too many caveats. Contingencies should not be viewed as something you want, they should be regarding as something you need; because any contingency you can do without just made your offer that much better without having to pay more for the home.

 

The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario. 

 

Posted by

Drew & Christine Morgan

"Helping People Make Good Decisions"sm

REALTORS | Notary Public

www.morganhomes.com

info@morganhomes.com

(650) 508-1441 DIRECT

(650) 590-4525 WORK DIRECT

DRE# 01124318/01174047

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Topic:
ActiveRain Community
Tags:
bay area real estate
belmont real estate
drew christine morgan
homes for sale in belmont
do i need a contingency in my offer

Spam prevention
Show All Comments
Rainmaker
1,317,757
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

There are definately a lot of thing for a buyer to weigh if they go without some of these contingencies.  It is can be risky and it is important that the buyer is informed.

Feb 16, 2013 05:44 AM #1
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainer
69,965

Drew & Christine Morgan

Belmont California Real Estate
Got a Question for us?
*
*
*
*

Additional Information