Learn How to Understand Contingencies in Real Estate Offers
How do some offers gain preference over others in the home buying process?
The terms, and offer price of the purchase agreement play a significant role in getting an offer accepted.
Of course, the terms could fall secondary to the offer price…
However today we will focus on the terms.
Today we will review traditional contingencies and what it means to the buyer and seller when a contingency is waived.
Let’s get started.
Contingencies can be a buyers savior and a sellers nightmare. Yes, the two can be complete opposites of each other dependent on the prior experiences of the parties involved.
Some sellers would rather deal with cash offers, just due to the nightmare experiences they’ve had with contingencies in prior transactions.
Of course a cash offer doesn’t always mean all contingencies are waived.
But when the preferred contingencies are waived, an offer could receive preferential treatment.
So why would a buyer waive any contingencies? The best answer is; experience and an extension of customer service.
A buyer that waives a contingency, has the experience and confidence in buying without the need for further confirmation, due to their ability to assess the property and their preparedness for any unknowns.
The buyer is also mindful that accommodating the seller with less demands, could grant them a favorable purchase, while also providing a service the seller may appreciate.
Let’s start by covering which contingencies are traditionally in a purchase agreement.
If you are questioning what contingencies you need to protect you in a purchase agreement, these are the contingencies you’d want to include in your contract terms as well.
Financing Contingency –
Before anything, you should have support for any prospective purchase. This is why most realtors will not tour properties with you if you don’t have a pre-approval or pre-qualification.
Of course, everyone likes window shopping from time to time, but to insure no time is wasted, everyone will not support window shopping with no money.
Whether in letter form from the lender, or as a bank statement from the buyer, proof of funds (POF) is the first step in showing you have the ability to close.
The POF will allow you to shop, but does not mean the lender will approve the purchase. The purchase must “pencil” or make sense, in comparison to your purchase price and the fair market value of the property.
The financing contingency is necessary when your lender needs to evaluate the deal and then provide feedback on whether the purchase is approved or not.
This is what the financing contingency consists of.
Appraisal Contingency –
The lender will hire an appraiser at a cost to the buyer, to evaluate the property, and provide an opinion on the fair value of the property.
The evaluation may include either a purchase in AS IS condition or the property’s potential fair value after the disclosed renovation plan.
The appraisal is a determining factor in what the lender will support financially.
If your appraisal is equal or more than the purchase price, then buyer will meet approval for financial support from the lender. If the appraisal is lower then the purchase price, then the buyer will need to cover the monetary difference in order to close.
If the buyer does not have the monetary difference, then with a financing contingency in place, the buyer will face defaulting per the purchase agreement due to not being able to acquire financing by way of the lender’s appraisal.
Understand that when a term (or clause) in the agreement is not upheld by the buyer or seller, either party can default. Although always reliant on contract terms, purchase agreements will express that any default can nullify the entire purchase agreement.
Any contingencies is like an “if, then statement” where if one term is not met, then some or all terms are subject to change. This is the purpose of any contingency.
This shows what the appraisal contingency consists of.
Title Contingency –
The title is a document that shows legal ownership to a property or asset.
Sometimes there are creditors who have placed a lien or levy on a title, to express a debt that must be satisfied, using the property as collateral for that debt owed.
If a clean title cannot be delivered in the transition of ownership, by way of the title contingency, this will cause the buyer to not close on the deal.
All prior levies or liens on a property must be satisfied if a title contingency is in place.
This is to protect the new owner from assuming liability to any creditors who’ve placed liens or levy’s on the property.
This shows what the title contingency consists of.
Inspection Contingency –
A qualified inspector is hired by the buyer to assess the condition of the property and will deliver feedback on areas of concern that could affect the value of the property.
Based upon the inspection, the buyer may decide to proceed, or back out of the deal.
Inspections can unveil property conditions that could comprise the perceived value of the property.
Upon receiving the inspection, the buyer will have a decision, to determine if any conditions brought forward are worthy of negotiation or if the property is no longer worthy of being purchased.
This shows what the inspection contingency consists of.
Now that we’ve reviewed the contingencies, let’s review buyer and seller sentiment related to these contingencies.
Each contingency is drafted in an agreement to bring awareness, protection to prevent uninformed purchases, and to confirm the value of an asset. It is up to the buyer if these contingencies are utilized in the purchase agreement.
Financing Contingency –
For the buyer this may be necessary if they are not using liquid cash. For the seller, if this is waived, it means the buyer can close based upon current contract agreements and funds are not a concern.
- This is definitely favorable to the seller because the seller knows the buyer can close without any party overruling the financial portion of the purchase.
Appraisal Contingency –
For the buyer this will definitely be necessary if there is a financing contingency where a lender is involved.
If the buyer has waived a financing contingency, they could still elect to have an appraisal done independently, but if they waive the appraisal it means they know they will purchase the property at the price the seller is willing to sell for, regardless of an appraisal report.
Every situation is case-by-case, and you never know why a buyer wants to buy a particular asset and what it is worth to them. This relates in perspective to underpaying or overpaying.
- If this contingency is waived it is favorable to the seller again because the seller knows an appraisal report will not affect the closing.
Title Contingency –
For the buyer this could be conflictual to what the title company may recommend, but this could be waived as well.
If the buyer waives the title contingency, the buyer must be prepared to assume the responsibility for any liens, encumbrances, litigation or debts against the property.
- Again, this would be favorable to the seller because the seller knows an unclean title will not affect the closing.
Inspection Contingency –
For the buyer they may waive the inspection contingency if they are proficient with assessing repairs and they are prepared for any unknowns.
If the buyer is not proficient with assessing repairs and are not prepared for any unknown conditions, the inspection contingency should not be waived.
- If the inspection contingency is waived, again this is favorable to the seller because the closing will not depend on the inspection report.
Sometimes, speed to close is desired by sellers.
With each contingency, there is the possibility of the closing time being extended. Sometimes, for inspections alone, there are several parties that are hired to assess their portion of the inspection.
For example, a certified pest inspector could be scheduled separately from the general home inspector.
When considering the inspectors, appraisers and title work, the minimum turn time is usually two weeks to have these individual practices completed.
- If a seller wants to minimize appointments and scheduling’s with multiple parties, each waived contingency will receive preferential treatment.
- If a seller is indifferent to the appointments and time it may take to close, the waived contingencies will not matter.
Based upon the buyer’s ability, preparedness and willingness to waive contingencies, it will always move in a favorable direction to the seller.
Not only could this grant a better customer experience to the seller, it may also be beneficial to the buyer.
If the seller is willing to pass along any savings to the buyer for creating a preferable experience, the buyer may also receive a favorable purchase price.
Purchase price in relation to waived contingencies is always a case-by-case situation. Some sellers are not willing to bargain for waived contingencies and some are.
We hope this article was helpful for you. Thanks for joining us faithful readers-future leaders.
Love ya and continue to strive for growth.
Please comment your experience with contingent and non-contingent offers.
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