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Let's Talk Contingencies

Terri White June 26, 2024

There are basically 4 contingencies to consider when presenting an offer to purchase a home: Title, Loan, Appraisal & Inspection. Loan, Appraisal and Inspection can all be waived to make your offer more attractive to a seller, but there are risks, and options, which we'll discuss here. 

Title is the one we cannot waive - your lender will want to be certain title will be delivered free and clear of any liens, judgements or encumbrances, to protect their investment. Although if you’re paying cash for your purchase, you can waive title insurance, in my opinion, it just isn’t worth the risk. Title insurers do an in depth search prior to close of escrow to be sure title will transfer free and clear of any encumbrances or shadows. If, on the very rare case an ownership claim arises, the title company insures against your losing the property to that claim. 

Loan contingencies are for buyers who have not had their loan fully underwritten approved. Most lenders are comfortable with you waiving this contingency as the only thing they have to confirm is the value of the property and that title is clear. Many first time homebuyers feel more comfortable having this contingency in place, even if they are fully underwritten-approved until they realize that it puts them at a disadvantage in a competitive bidding situation. 

An appraisal contingency gives you the right to either cancel the purchase or renegotiate if the appraisal does not come in at or above the accepted purchase price. If an appraisal comes in low, you can ask the seller to either reduce the purchase price or grant you a credit at closing, which allows you funds to offset part of your closing costs. (Keep in mind most lenders cap this credit at 6% of the purchase price). However, in a multiple offer situation, the seller may have a back-up offer waiting in the wings, which would make them reluctant to negotiate a price reduction. If they refuse, you still have options to keep from losing the house. You can offer to split the difference between the purchase price and appraisal amount with them, or you can make up the difference by adding cash to your down payment to make up the difference, or even reconfiguring your loan - maybe you put down 5% instead of 10% and put the balance toward the appraised difference. In some fast-moving markets, buyers will include an addendum with their contingency to cap the additional cost. That addendum might read something like, “Buyer agrees to pay up to an additional $5000, to meet appraised value, and Seller agrees to accept this amount and either provide Buyer with a closing cost credit, or reduce the purchase price of any balance to meet the appraised value.” Or, you can simply waive the appraisal contingency if you have enough of a down payment to move it around a bit to include covering a low appraisal. Remember, everything is negotiable. 

And last but not least is the Inspection contingency. This one is the largest umbrella and covers the most broad array of possibilities. It is probably the most feared by sellers, as a buyer can cancel the purchase for just about anything they find that the seller did not disclose. In our market, most sellers provide all of their disclosures, including pre-inspections in advance in an attempt to avoid having an inspection contingency. In the East Bay, as listing agents, we provide as much information as possible to prospective buyers so they can be confident in determining the value of a property and in waiving their inspection contingency. It also makes the transaction much smoother and faster if all of the prep work is done in advance. Occasionally, like in other markets, you will see a home come on the market with no information, leaving buyers to do their own inspections. That leads to delays and additional negotiation after an offer was accepted if any damage is found. It can also lead to contract cancellation, which in turn means sellers have to put their homes back on the market and ultimately end up with a lower purchase price - all because they didn’t get inspections up front. That doesn’t seem quite fair, so we try and show the buyer everything up front, so everyone can base their evaluation and offer on the full picture of the home. When you know what you’re buying it’s a lot easier to figure out what it’s worth. It also helps put multiple buyers on even ground, as they all have the same info. Buyers with inspection contingencies can back out of a contract for any number of things - how noisy the freeway is at rush hour, the local school district scores, a roof that needs replacement, or news that an apartment complex is being built down the block - pretty much anything about the house itself or the neighborhood where it is located that may affect its value. Sellers want to accept an offer from a buyer they are confident will not back out of the contract. Going through the process of prepping a house, marketing and selling it is difficult, expensive and time consuming. Having to start over if a buyer backs out of a contract, often ends up with a lower sale price, so sellers will most often choose a buyer who is willing to waive an inspection contingency to eliminate the chance they will back out, because it is costly for them. 

That is not to say buyers should always waive an inspection contingency. They should not, if the inspection reports are missing or substandard. We are familiar with the reputations of all of the local inspectors and will review their reports with you to ensure they are thorough. We always recommend inspectors are certified to get the best possible outcome. In very competitive situations where a buyer is confident in wanting to purchase a home, but the inspections are not up to par, we can get an inspection in advance to be certain of the property value and point out any defects.

A contingency is essentially a time frame to get certain acts completed. If you do not remove your contingency at the time interval you have promised in your purchase agreement, the seller has the right to cancel the contract, retain your earnest money deposit as liquidated damages, and move on to another buyer. The loan and appraisal contingencies are lender dependent, so we will consult with your lender before/if we are including either. The inspection contingency is dependent on what you want to inspect, so we have to be very specific when selecting any contingency to include in your offer. 

If this brought up more questions, please do not hesitate to reach out. Real estate is a fast moving target and just about everything is negotiable.

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