Last week my team helped 4 clients go into contract–2 Buyers and 2 Sellers. The properties covered a wide range of neighborhoods and styles, from a beautiful 2 bedroom TIC in the Castro for $1.2 million to an impressive $3.5 million view home in Golden Gate Heights, but the common element was that the Buyers waived all their contingencies.
In fact, of the 20 properties that we have been involved with over the last few months, all of them had no contingencies except for one, which had a 2 day inspection contingency.
Sellers hate contingencies because a contingency allows the Buyer to either renegotiate the contract or back out of the deal entirely without forfeiting their 3% Good Faith Deposit. In this Seller’s market, the practice of waiving all contingencies has become the norm, because Buyers are facing heightened competition for a limited number of homes and waiving contingencies is one way to make their offers more attractive to Sellers.
Here are the 3 most common contingencies and the implications of waiving them.
Home inspection contingency
The home inspection contingency allows the Buyer to hire an inspector or perform more investigations on the home. We do not recommend waiving the inspection contingency without sufficient knowledge of the home’s condition. You get some of that knowledge by studying the entire disclosure packet provided by the Seller, including any pre-inspection reports. The State of California requires the Seller to disclose all material facts about their property and it is in the Seller’s interest to divulge all the bad news up front.
Buyers can also learn much by talking with the inspectors who wrote the pre-inspection reports and asking them to explain their findings in greater detail. There are a limited number of inspectors who are well known and respected in the City and Buyers can be comfortable with their reports. Sometimes they walk through the property with a licensed general contractor, to get more information about the costs and implications of specific issues. We also encourage Buyers to hire their own qualified inspector(s) to get an independent opinion before submitting the offer.
Remember that waiving the home inspection can be very dangerous and you need to know what you’re getting into.
The financing contingency allows the Buyer to terminate the contract if they are unable to get the exact loan terms that are specified in the contract. Of course if you have cash, you do not need a loan contingency. But with interest rates at their current low levels, we often find that even buyers who have the cash are opting to get financing.
If you waive the financing contingency, you should feel confident that you have alternative ways to get financing if your first lender falls through. A standard pre-approval is not a guarantee that you will get your loan. Some lenders and loan types can be pre-underwritten. Underwriting means that the lender has verified your income, assets, debt and is ready to give you final approval on your loan as soon as you identify the property.
The lender will hire an independent appraiser to come out to the property and write a written opinion on the value of the home. If for some reason the home appraises for less than the contract price, the Buyer can either make up the difference, re-negotiate the price or back out of the contract.
If you have waived the appraisal contingency and the property does not appraise at the contract price, you will have to pay the difference in cash. Therefore, we ask our Buyers to confirm that they have sufficient cash reserves to do so. Before making the offer, we review the most recent sales of comparable properties and assess whether the appraiser will find objective evidence to support the contract price. In a multiple offer situation, we also share statistics on the number of offers that were submitted on the property, their price ranges and details about any backup offers that were submitted on the property. Different appraisers may value various aspects of the home differently, so this process is an art as much as it is a science.
Before deciding whether you are comfortable waiving contingencies, make sure that you consult your lender, your home inspectors and your real estate agent. We are all a team and we can help you decide for yourself whether you can take on that risk.