ARE YOU READY TO HANDLE THESE 3 IMPORTANT CONTINGENCIES?
A CONTINGENCY IS A CONDITION YOU WANT MET BEFORE PROCEEDING WITH AN OFFER. BOTH BUYERS AND SELLERS PUT CONTINGENCIES ON OFFERS TO CONTROL THE OUTCOME. HERE ARE THE BIG 3...
WHO HAS THE MOST CONTINGENCIES
— BUYER OR SELLER?
Buyers often have the most contingencies...they want the house inspected, they want to know you'll remove that old car on blocks before closing, they want to be sure there are no hidden liens on the property. They don't want to move in and be faced with a crumbling foundation right away! Sellers also have contingencies...they want to know the buyer is going to get their loan by a certain date, and they want to be sure the buyer is acting in good faith to get all of their contingencies met within a certain time frame. All this is so that the seller isn't holding their property off the market for too long. They have plans to make, places to go, possibly debts to pay! In today's mad world of multiple offers, cash offers, and under-appraisals, it's tempting for buyers and sellers to ignore contingencies. Sellers who are handed an all-cash offer with no contingencies are in a great position. They just say yes, and the deal is done. But that might mean missing out on better offers. Buyers who have to compete against those cash offers are in a hard position. They’re tempted to eliminate as many contingencies as possible to make their offer as strong as possible. But that might create a bigger problem later. Here are the top three contingencies that both buyers and sellers need to know how to manipulate to their advantage.
1. THE HOME INSPECTION: BUYERS
This is tough. You don't want to ask the sellers to do a lot of niggly little repairs. But you don't want to buy a house with a cracked foundation or leaking septic tank, either. You can try spelling out the exact nature of the inspection contingency you want to be covered, such as "Subject to a foundation inspection," or "Subject to an electrical inspection." But if you already plan to replace the electrical, there's no sense in having it inspected. Generally, the older the house, the more repairs will be required. If you're buying an old house and you don’t have deep pockets for repairs after purchase, then you should probably stick to having a full inspection contingency in your offer. You don't have to require the sellers to make any repairs or pay for them. You can simply walk away from the deal if the repairs prove to be too much. If your offer (with a full inspection contingency) is rejected, you might just have dodged a bullet. By the way, even if you forego the home inspection as a contingency, you should still get a home inspection done for your own benefit, so you know what repairs you'll need to make.
THE HOME INSPECTION: SELLERS
If you have your own home inspection before you put your home on the market, there won't be any surprises to negotiate later. You can more comfortably request that buyers remove the inspection contingency. Of course that's not an issue if it's an all-cash, no-contingency offer. Even if you get an all-cash offer, it might be lower "to make up for potential repairs." But if you've already done your own inspection, and it shows there's not much to repair, you might pressure for a higher cash offer, or you might want to take a higher offer from a loan-based buyer.
2. THE LOAN CONTINGENCY: BUYERS
If you need a loan, you need a loan. You'll have to make the best offer you can, subject to a loan contingency. In that case, make sure you get a "fully underwritten loan approval" and make sure to say that's what you have when you present your offer. Basically you're saying that short of being incapacitated, you're qualified for the loan. However, there's still that chance of something happening to prevent you from getting the loan in the 11th hour, which makes an all-cash offer more appealing to a seller. To compete with that possibility, you might be tempted to offer a lot higher price to make your loan contingency less of Your real estate agent for life! an issue. But then you'll need to come up with more cash to cover the difference between the appraisal and your offer. If you have extra cash, great. If you don't, then you probably need to talk with me about finding properties in a lower price range, so you have more wiggle room with your cash.
THE LOAN CONTINGENCY: SELLERS
You don't need to bother with a buyer's loan contingency if you get an acceptable cash offer. Acceptable is the key word. A solid buyer with a full loan approval might offer you more money than a cash buyer, with little downside to you. There's still some risk. If the buyer is incapacitated, they can't get the loan. That rarely happens.
3. THE APPRAISAL CONTINGENCY:
BUYERS & SELLERS
The tricky contingency these days is the appraisal. With an all-cash offer, there is no appraisal required (though some cash offers will include it as a contingency). But with a loan-based offer, there will be a lender's appraisal. If that appraisal is lower than the offered price (say $400,000 when the offered price is $450,000), the buyer has to come up with the difference (an extra $50,000). But no one can know what the appraisal will be until after the offer is made and accepted. Built into a loan-based offer is a buyer's appraisal contingency that says they can walk if the appraisal isn't equal to the price. Or some such language. If you're a buyer Your real estate agent for life! with extra cash to put towards the appraisal difference, make sure you cap it...require the appraisal to come it at a maximum exact percent of the offer price. Then sellers can compare your total offer to their cash offers. By the way, if you think you'll need extra cash to make up the appraisal difference, consider putting less money down so you have more cash in hand.
Dealing with these three big contingencies is a matter of forethought and careful calculation. You need a professional real estate advisor to help you evaluate your options and craft the best offer or counter-offer you can, given your circumstances. I help home buyers and sellers come to an agreement. Call me for an appointment to discuss your steps— from offer to closing day.