Think Twice Before Waiving Contingencies!
It’s a tight market out there for buyers, that’s for sure. I’m seeing more offers being written with shortened contingency periods, or contingencies waived entirely as buyers compete for homes. After losing out on a few, it may be tempting to waive one or more of your contingencies. Don’t be fooled, though, into believing you can wiggle out of losing big if you find one or more major flaws in the property, your appraisal falls short, or you have an unexpected issue with your financing. It could cost you your entire earnest money deposit or more if you decide to pull out and you have waived, or released the applicable contingency.
There are there are 3 main categories of Contingencies:
Investigations is comprised of just about anything and everything you want to know about a property before you buy it:
Physical Inspections (inspections concerning physical attributes of the property)
Review and Approval of the Preliminary Report (becoming aware of any issues with Title, Encumbrances/Easements, etc.)
Review of Seller Disclosures (and opportunity to get additional information from Seller if needed)
Review of Natural Hazard Report (is property in a flood, fire, earthquake zone, etc.)
Common Interest Disclosures (HOA documents-What can you do and not do per Association Rules, financial status of the Association, what is paid for or not by the association, etc.)
Review of leased or liened items (e.g. a leased solar system, a HERO loan for improvements made by the seller, etc.)
Any other issues that may be important to you (e.g. crime statistics, neighborhood nuisances, schools, etc.)
Waiving the Investigations Contingency means that no matter what you find, should you cancel based on findings from any of the above, you could lose your Earnest Money Deposit (or more).
If you are buying the property with entirely your own cash, you are not required to have an appraisal, however if you are financing any portion of the purchase, it’s likely your lender (the investor) is going to require an appraisal inspection and report be completed, and that the appraised value of the property is at least what you are paying for it. If the appraised value comes up short, your lender is likely to deny your financing.
There are some potential remedies for an appraisal that falls short, including:
You can bridge the gap between the appraised value and the purchase with your own cash (if you have it).
You can ask the seller to reduce the price to the appraised value (good luck with that one).
You can ask the seller if they will meet you part way, for example asking if the will split the difference with you—they reduce the price some, and you bring in cash to make up the difference.
You can cancel if your Appraisal Contingency is still in effect and are likely to retain your deposit.
If you have waived your Appraisal Contingency, you cannot cancel based on the appraisal falling short, and if none of the remedies listed above are possible, you could lose your Earnest Money Deposit (or more).
Please note that a buyer may not use the loan contingency if the sole reason for not getting the loan is that the appraisal came in short! This is a common misconception that could be very costly.
Many buyers are under the illusion that if they received a “loan approval letter” that they are good to go with their financing. This misconception has backfired on many. The preapproval is NOT a guarantee of financing, and many unforeseen events or circumstances could affect final loan approval. Here’s just a sampling:
Unexpected job loss
Change in debt to income ratio
Unexpected accident or death of a buyer
Wild swing in credit score
Previously missed financial obligation
Discovery of misrepresented information provided to the lender
Co-signer backs out
Defect of Title found in final title search
While I would never advocate waiving your contingencies, it may be necessary for getting your foot in the door to shorten them. Be aware that Investigations is a very large category, and time is needed to plow through important information you’ll need to make a sound decision as to move forward or cancel. Also check directly with your lender as to the current average turnaround on appraisal reports and loan approvals before shortening your timelines to ensure they can be met.
Working with an experienced agent who is dedicated to your success, which includes keeping you out hot water, should be your first priority at the start of the purchase process. There are many nuances involved with a purchase or sale, and you’ll want the best guide you can find.
If you are considering buying, selling or both but aren't sure if this is the right time for your particular situation, reach out to me and let's talk through it. The more you know, the better decisions you can make.