Buying a House: Should I Waive Real Estate Contingencies?
What are ‘Contingencies’?
Contingencies are magical little contract clauses that can prevent you from losing your shirt when you buy a house. And yet – as home prices have increased and inventory has shrunk – the need for contingencies is increasingly open to question.
After all, if you see a nice house at a good price, won’t it attract multiple offers in today’s hot markets? Doesn’t it make sense to dump your contingencies to out-gun other bidders?
To answer this question we first need to take a basic look at the real estate contracting process.
Offer, acceptance and counter-offer
Picture a property listed for $400,000. A couple comes along and says, “We’ll pay you $400,000 for your house.” The seller says, “I accept.” Now we have an offer and acceptance. Together they create a contract.
But – as often happens – buyers might offer not offer $400,000. Instead, they could bid $395,000. The seller may accept, decline, or respond to this offer with a counter-offer.
For example, the seller may accept the $395,000 price on the condition that the buyer agrees to a longer-than-usual escrow or the seller may counter at $400,000, which is what many do to tell you that their price is firm.
Once you have an offer and acceptance, i.e. a contract, you can open escrow and begin the legal transfer from seller to buyer.
Contingencies: conditions that must be met
In the example above, we had an offer and a counter-offer, but in many real estate transactions there’s a third approach, the contingent offer. In fact, more than 95% of all offers in St. Louis, Missouri have financing and appraisal contingencies in place.
With a contingent offer, each party can spell out conditions which need to be met before the sale can close. For example, a seller might say “I’ll accept your $395,000 offer if you can get a pre-approval letter showing within seven days that you have the ability to finance this purchase.”
A buyer might make an offer subject to obtaining financing with five percent down and a rate under four percent.
In the back-and-forth between buyers and sellers, precision counts. How a contingency is written can have substantial implications when you buy a house. Consider some general language with a home inspection in the examples below.
Examples of contingencies
One typical contingency when you buy a house is the right to have a home inspection. Normally, the buyers has to complete the inspection within a certain time. If the inspection is not “satisfactory” to the buyers, the offer is withdrawn and the deposit returned. We highly suggest having this contingency in place for all of your purchases in Missouri.
Negotiating tools
Contingencies are often used as a negotiating tool. Smith makes an offer to buy a property. In the offer is a financial contingency. The buyer must be able to get four percent financing.
In a very unlikely scenario, just after the offer is written, interest rates suddenly surge. The buyer says to the seller, “The property at this price no longer works for us because mortgage rates have gone up. Lower the price by $7,000 and we’ll waive the contingency.”
Does the seller say yes in this hypothetical scenario? Maybe, maybe not. However, in this situation, the buyer leverage, because it may be difficult to find a replacement buyer plus the interest rate will be higher for any new purchaser.
Waiving contingencies
In some markets, especially in California, but also in some areas of St. Louis, there are relatively few homes for sale, intense competition, and as a result lots of homes that receive multiple offers. With bids above asking prices buyers look for an edge, and one idea is to waive all contingencies.
While waiving all contingencies may seem like a good idea in the heat of the bidding process, the reality is that such an approach has substantial risk.
What if you buy a property and find after closing that the heating system barely works? What if you cannot close because mortgage rates rise and you no longer qualify for financing – will you lose your deposit?
The contracting process is complex, and neither buyers nor sellers are likely to be experts in the field. For that reason, it pays to engage a real estate agent to help with offers and counteroffers. Be sure to ask about contingencies – and be sure they reflect what you really want to say.
Posted by: Carlson Mortgage – a top-rated St. Louis mortgage broker providing home loans in the state of Missouri. We are routinely ranked as a #1 mortgage broker in Missouri on Yelp, Google and Zillow. We can be reached at (314) 329-7314 seven days a week.
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