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Contingencies, and How They Affect You...

November 08 2018
November 08 2018

 

You've found the perfect house that could be your home! You've also reviewed the seller's disclosures, and determined an offer price. Now it's time to get familiar with the contingencies that will affect you.
First, what are contingencies? In plain language, contingencies are conditions built into a contract that gives the buyer the right to back out of the contract if something goes wrong.
Let's assume the disclosures look OK, also, you've determined your offer price by reviewing comparable sales (comps). Now let's review what types of contingencies and offer details you will need in your offer to make it competitive, but also protect you in the process.
The details of an offer are loosely referred to as "terms". To make terms as attractive as possible, some buyers waive their contingencies to make it more likely that their offer will be chosen by the seller.
There is a lot of risk in doing this! In fact, this is one of the few, if not only, markets in the world where buyers routinely waive their contingencies.
The three most common contingencies that exist in a California Association of Realtors Purchase Agreement are the following.
-An Inspection contingency
-A Financing Contingency
-An Appraisal Contingency
*There are many others, but the above are the most common.
Let me help to explain these to you.
Inspection Contingency
This contingency allows a time period in which the buyer can cancel the purchase agreement (after the Seller has accepted your offer) and still be refunded the earnest money deposit (typically 3%) which is held in escrow at the title company.
If you have an inspection contingency in your offer, great! If not, it's important to understand that you can't cancel the agreement and expect to be refunded your deposit.
The agents and sellers of a listing want this contingency waived because it gives the buyer the opportunity to re-negotiate the price based off of any findings in the inspections or reports.
I encourage my buyer clients to re-negotiate the purchase price if they have their own inspections done. The seller doesn't have the ability to cancel the escrow with the buyer until the contingency time frame is up (assuming they've been given a "notice to perform" and the buyer has not removed their contingency).
Make sure you're comfortable with the condition of the home including all inspections and reports before even considering removing this very important layer of protection.
Financing Contingency
Like all contingencies, a financing contingency is very important. During the pre-approval process, it's very important to be "fully underwritten" with your lender, prior to making offers.
Being fully underwritten is far more important than a pre-approval, because it gives you conditional approval.
If you're planning to waive your financing contingency your lender must know all of the intimate details about your financing scenario. A pre-approval is only a verification of income, assets, and credit.
To remove financing contingencies your file should be underwritten by your lender and any blemishes in your underwriting package should be uncovered and understood. If you waive your financing contingency, and your loan is denied for ANY reason, you will theoretically be expected to forfeit your earnest money deposit.
Appraisal Contingency
If you're paying all cash, you don't need to worry about appraisal or financing contingencies.
However, if you're getting a loan, most lenders are going to require an appraisal.
A lender doesn't take the price you offer the seller as the value, it takes their appraisal as the value. If you're planning to put down 20% of the purchase price or less on your home, this appraisal contingency can completely kill the transaction.
In the event that you're putting down a 20% down payment, and you have no additional funds (minus the monthly mortgage reserves required by your lender) you need the appraisal to come back at the price that you offered the seller. In the event that the appraisal comes in low (below your offer price), the buyer is expected to make up the difference in CASH. If you don't have the cash available YOU NEED THE CONTINGENCY!
If you have other cash available, you will be expected to put it towards the purchase because the lender will only give you 80% of the APPRAISED VALUE unless you can qualify for a higher loan amount or have more cash available.
Conclusion
Many buyers are waiving contingencies on their home purchases in today's hot market. By waiving these contingencies the Seller understands that after the buyer's deposit is in escrow, they can't cancel the agreement without forfeiting their deposit. Remember there is no contingency for "changing your mind" or getting "buyers remorse" which are very real scenarios. Be sure that you've done your homework, can easily justify your purchase price, are comfortable with the condition of the home, and your finances are in order before waiving any contingency in an offer to purchase real estate.
*I'm not an attorney and this is not meant to cover all of the risk associated with removing contingencies when writing an offer to purchase real estate.* If you have further questions please consult an attorney when waiving contingencies. This is meant for informational purposes only.

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