In the midst of a highly competitive real estate market, you often hear about buyers submitting non-contingent offers in an effort to make their offer more appealing to a seller. But what exactly is it that they are waiving, and why?
The importance of contingencies
Contingencies are the conditions that are stated in the Real Estate Purchase Agreement that must occur prior to moving on to the next step in the transaction, in essence, safeguards implemented to protect one or both parties during the due diligence phase of the purchase. There are many contingencies that can be included when purchasing a property, here are the most common and what they mean:
A buyer typically has 17 days to complete their inspections. This is an opportunity for a buyer to have a licensed home inspector inspect the home, obtain any other inspections such as Termite, Roof, Plumbing, Septic, Sewer, Foundation, etc. During this time, it is up to the buyer to satisfy themselves that the home they are purchasing is sound and that if it does have any structural or safety issues that they are fully aware of it. Upon discovery, the buyer has the option to purchase as is with knowledge, to request from the seller to correct or credit for the issue, or cancel transaction without forfeiting their earnest money deposit.
An appraisal contingency is meant to validate the value of the home. Appraisal is ordered by a buyer’s lender as a third-party evaluation of the home. This is a safeguard for the lender to ensure that they are not lending more than the property is worth, but also to the buyer to make sure they know the value of the asset they are acquiring.
In a standard contract, the buyer has 17 days to have the appraisal completed at which time if the value comes in under what the purchase agreement is for, the buyer has the right to request the seller to reduce price to current appraised value, pay cash for the difference in appraisal gap (as long as their lender approves), or cancel the transaction without forfeiting their earnest money deposit.
In today’s market, with the high demand of buyers and low inventory, buyers often come in waiving their appraisal contingency. This is essentially the buyer agreeing that they will pay for any difference between the purchase price and the appraised value should it come in lower. There are conditions that can still be implemented such as a maximum amount.
Prior to starting the home buying process, brokers will request their clients be pre-approved for a loan. This identifies that the buyer is qualified to purchase as well as what price and terms they are approved for. Once a property is identified, a buyer ordinarily has 21 days to have their loan fully approved. This allows ample time for the lender to have appraisal ordered and received back, underwriters to review the buyer’s credentials and to make final decision that the lender will in fact lend on the property that the buyer is purchasing.
If there is a change in employment, credit or even an issue with the subject property, as examples, the lender may decline a buyer which means they cannot obtain a loan for that property. If this occurs during their loan contingency, the buyer has the right to cancel and retrieve their earnest money deposit.
Buyer Contingency for Sale of Their Property
No one wants to find themselves homeless during the process of selling their home and purchasing a new one. A buyer will often include a contingency stating that they must sell their home in order to have the funds to purchase their new home. This timeframe can vary depending on whether their property is already listed for sale, in escrow or other circumstances. There is an addendum that is included in the offer to a seller that outlines where the buyer stands with selling their home and specific timeframes for them to close on a purchase.
On the flip side, it is common that a seller is selling their home but hasn’t found a place to purchase, therefore they need a contingency to insure they aren’t without a home.
Seller’s Contingency to Purchase a Replacement Property
Much like a buyer’s contingency to sell their home, the seller often needs to find a new home to purchase. By having their home in escrow, they become a stronger buyer when submitting an offer on their replacement property. There is an addendum that outlines the terms and conditions of this contingency, and varies based on each seller’s needs, the market conditions and location of where they are moving.
Contingency periods take effect from the date the purchase contract is fully executed, and as each contingency date comes due, the buyer and/or seller is required to submit a contingency removal stating that they are moving forward with the transaction.
Once all time periods have expired, and everyone is ready to move forward with the final closing, a full contingency removal is executed. This is the point where the buyer and/or seller have completed all due diligence and fully commit to purchasing the subject property. This can be scary, especially if a first-time homebuyer, as it means your deposit can be at risk should you cancel.
Before you get overly excited and submit a non-contingent offer or reduced contingencies, be sure to educate yourself on what that means and how it can affect you personally. It is extremely important to hire a broker who is experienced and knowledgeable, who can guide you properly through the process, and insure that your best interests are at heart.