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Should you remove your contingencies? We get asked this question all of the time. We cannot give you advice as to what you have to do, but we do want to demystify what this is all about.
When a buyer submits an offer on a property they have an opportunity to include certain conditions within the contract that must be met in order to complete the purchase. Should these conditions not be met to their satisfaction within the agreed-upon timeframe listed in the contract, the contingencies set forth within the contract would allow them to back out of the contract without any financial obligation.
There are three main contingencies within the contract: inspection, appraisal, and financing. There are additional contingencies, but these are the primary ones that seem to be of interest in our current market.
- Inspection. This is the timeframe you have to do your due diligence including inspections, review disclosures, check permits, etc. At the end of the designated timeframe you may have the opportunity to renegotiate with the seller or back out. However in our market, this is the number one contingency that most buyers will remove. In 2012 the market changed rapidly and buyers needed a way to make their offer stand out – and thus entered the Pre-Inspection to the marketplace. Buyers quickly realized that if they invested a little time {and money} prior to submitting an offer, and did all of their due-diligence upfront, they could comfortably remove this contingency. And those offers were favored by Sellers. Fast forward a few years and most Sellers are now doing the inspections upfront so that all buyers can be on more of a level playing-field and have an opportunity to comfortably remove their contingency.Should you remove this contingency? We have seen enough disclosure packets to know whether the Seller has provided enough information that SOME Buyers will feel comfortable removing the contingency. Should you want to remove this contingency we will guide you through the disclosures so that you can do your upfront due-diligence. Once you have all of the information you can then make the right decision for you. If you need to have this contingency then consider keeping it short, 3-5 days.
- Appraisal. The appraisal contingency allows you to renegotiate {or back out from} the deal if the appraisal comes back less than the purchase price. If you are obtaining a loan the lender will require an appraisal. Although the loan and appraisal are interconnected they are independent contingencies. For a conventional loan a lender will only lend on 80% of the value so if the value comes in at less than 80% of the purchase price you will either need to increase your downpayment, ask the seller to reduce the price, or cancel the contract. If you do not have this contingency then your only option is to bring in additional money towards the down payment.Buyers started removing this contingency a couple of years ago and has now become commonplace. We always want to cross-check the recent sales to determine what the appraised value might be. Waiving this contingency will make your offer stronger so if it seems likely that the property would appraise at your purchase price we will then have you consult the loan officer to talk about your options for increasing the downpayment in the event the property doesn’t appraise. In certain cases we may ask the loan officer to take a look at the property to see if there might be any reason a lender would not lend. Not comfortable removing this contingency, or trying to keep your downpayment low? Consider offering the seller a certain dollar amount that you are willing to come up with in the event it doesn’t appraise.
- Financing. The financing contingency states that you will be able to secure a loan within a certain number of days and protects you in case something goes wrong. If you are paying cash you will certainly remove this contingency. If you are getting a loan this is one of the riskier ones to remove – if you are unable to secure a loan for any reason you will still be legally obligated to move forward with the purchase. Unfortunately, buyers have started to remove this contingency as well. Why? To compete with cash offers. Some banks and direct lenders have stepped up the pre-approval process to where your pre-approval is fully underwritten subject to a purchase contract, appraisal, and title report. This is as good as it gets with the pre-approval. If you want to remove this contingency then make sure your pre-approval is underwritten as far as it can be, or that you have other financial means to close the sale.
Because all offers are different please make sure you speak to your Agent to see what is the right direction for your offer. And keep in mind we are not attorney’s and cannot tell you what to do. But we will tell you what a competing offer might look like, and then help educate you so that you can make the best decision for you.