Should You Write a “Love Letter” to a Home Seller?
Dan S | Apr 26, 2022
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By Dan S on Apr 4, 2022
When you finally have your dream home in your sights and you (finally!) made the winning offer, the last thing you want is for the deal to fall through. But at the same time, you want to be able to walk away if a huge deal breaker is revealed in the time between your offer being accepted and closing. If the home inspection reveals the house is actually a money pit or the property title is in dispute, for example, of course you want to be able to get out of the contract. This is where contract contingencies come in.
What is a contingency clause, why is it important, and when should you think about waiving contingencies when buying a home? Read on to find out about 7 types of real estate contingencies – from common to obscure.
A contingency is a condition that must be met before a deal is finalized. In a real estate transaction, contingencies are usually designed to protect the buyer by letting them walk away from the sale if specific conditions are not met. Contingencies can also slow down and complicate the home-buying process. Or terminate the deal entirely. And who wants that?
In a sellers' market, anything that slows down the process puts buyers at a disadvantage, especially if they're trying to win a bidding war against other interested buyers who have fewer strings on their offers. That doesn't mean you can or should remove every contingency in your offer.
Here are explanations of different types of real estate contingencies and when they are useful (and when you should consider waiving them).
What to know:
Typically, a mortgage lender will not approve a loan where the loan amount is out of line with the appraised house value.
That's because a low appraisal means the property may not provide enough collateral to support the amount of the loan.
An appraisal contingency allows the buyer to back out of the contract with no consequences when a home appraisal reveals the value of the home is lower than the offer price.
For a seller, a low appraisal coupled with an appraisal contingency means they'll either be forced to renegotiate the sales price or find another buyer who will meet the sale price despite the appraisal value.
When to waive: Waiving an appraisal contingency can be the difference between winning and losing in a multi-offer situation. According to the January 2022 RealtorsⓇ Confidence Index Survey, 22% of buyers in the previous three months waived an appraisal contingency.
If the buyer has the means to make a cash offer — or can cover the appraisal gap out of pocket — this tells the seller that the buyer can pay the price they bid even if the appraisal comes in lower. Buyers using traditional financing will be limited in their ability to waive this contingency by their lender's rules if they don't have enough additional cash to cover the deficit.
Waiving the appraisal contingency can be risky because the gap may be much higher than you expect or are able to budget for. If you make an aggressive bid in order to win, and you waive the appraisal contingency, you may find yourself needing to come up with many tens of thousands of dollars out of pocket – or find yourself in breach of contract.
If you make an offer backed by Accept.inc, on the other hand, you buy with the power of cash and waive your appraisal contingency entirely. That's because Accept.inc provides a Value Check on the home before you make your bid. Our process guarantees that you'll know the maximum appraisal gap you might need to cover; your gap will not be more than the difference between your bid amount and the Value Check (assuming your offer is higher than the value check).
Why does this matter? It means no surprises. With traditional financing, you won't know until well into the process how much extra cash you need to have lying around to make up the difference between your offer and the appraised value (or your loan amount).
With a Value Check in hand, on the other hand, you'll have the confidence to make an offer knowing your maximum appraisal gap amount and how much you can bid. It protects you — and the seller — from appraisal gap uncertainties.
What to know:
A financing contingency, sometimes called a mortgage contingency, allows a buyer to pull out of the contract with limited consequences if they're not able to secure the needed mortgage.
The simple pre-approval that a typical lender does when you're shopping rates doesn't guarantee that your financing will come through during the final underwriting process.
If a buyer chooses to omit the financing clause in their offer but cannot get the funds in time for the closing date, they likely have to forfeit their earnest money deposit. The seller would have to choose between delaying settlement in hopes that giving the buyer additional time will allow them to secure a loan or putting the home back on the market.
In Q4 of 2021, nearly 30% of home contracts were delayed or terminated and more than 20% of those delays and terminations were due to financing issues. (Source: January 2022 RealtorsⓇ Confidence Index Survey)
When to waive: If you're making an offer that depends on a traditional mortgage, there is a risk that financing will fall through. And you don't want to be on the hook if you waived this contingency.
Cash buyers, on the other hand, make offers without a financing contingency; they can show proof they have the liquidity to pay the full offer price with cash in the bank – no strings attached.
How do you compete with a cash buyer that's flashing a metaphorical trunk full of cash? By making a good-as-cash offer yourself! When you're Cash Approved by Accept.inc, you get all the benefits of paying a mortgage over time, but you are able to make a full cash offer using Accept.inc's proof of funds.
Learn more about the difference between a mere pre-approval and an Accept.inc Cash Approval.
What to know:
A home inspection contingency, also known as an inspection rider, allows the buyer a chance to back out of the sale if the home inspection reveals significant problems or issues with the property.
This contingency can also allow for negotiating repairs and the associated costs with the seller.
It is the buyer's responsibility to arrange for the home inspection within a week or two of the contract being signed.
When to waive: In a highly competitive market, a lot of buyers find themselves under pressure to waive the inspection contingency because they know a seller will prefer offers that don't include one. But if you've seen the Tom Hanks and Shelley Long classic "The Money Pit," you might be leery of buying a house without knowing what's wrong with it and how much it would cost to fix. And rightly so! That's why some serious buyers ask for what's called a pre-offer inspection. If they find issues with the home, they would simply choose not to put an offer in. This makes the inspection contingency a moot point.
Unfortunately for buyers, a pre-offer inspection is nearly impossible to do in highly competitive seller's markets because it requires the owner to agree to let an inspector into the home prior to going under contract. As you've undoubtedly seen in the frenzy of the market in the last few years, many homes are pending sale mere days after the listing goes live (which often means offers were submitted after the first open house, if not before). Allowing for a full pre-sale inspection isn't attractive to sellers, especially if you consider that they would be required to disclose any major issues that come up in an inspection once they are made aware of it. Doing a pre-sale inspection can be a great strategy for avoiding the inspection contingency, but it is often not a viable option in a seller's market like we are seeing in many metro areas these days.
That said, skipping the home inspection entirely, even if you're worried it might be the only way to win your offer, is an exceptionally risky move.
What to know:
Sometimes a buyer needs to sell their current home before they are able to afford a new home. A "home sale contingency," therefore, stipulates the buyer's current home must be sold before the new sale can proceed.
This contingency usually comes with a deadline. If the house is not sold by the end of the contingency period, the contract can be extended, or the seller can back out of the deal.
There are two types of home sale contingencies: a sale and settlement contingency, and a settlement contingency.
A sale and settlement contingency is used when the buyer is selling their existing home but hasn't yet received an offer or signed a contract. Under this contingency, the seller may use the "kick-out clause." A kick-out clause means the seller may continue to list the home and entertain other offers, potentially "kicking out" the current buyer in favor of another offer.
Under a settlement contingency, the buyer's home is already under contract, but they just need to complete closing on their old property. In this case, the "kick-out clause" is not applicable, and the seller cannot continue to market the property as for sale.
When to waive: While being able to sell a home before starting payments on a new one is obviously ideal for the buyer, be warned that including a home sale contingency in your offer (also known as making a "contingent offer") is highly unattractive to sellers.
If you have no choice but to submit an offer with a home sale contingency, do everything you can to make it significantly more competitive. That may mean offering a higher price or making a cash offer (which eliminates financing and appraisal contingencies), or possibly both. Strategize with your real estate agent about what it will take to be competitive if there's no way around this requirement.
The good news: If you're a first-time home buyer, then this contingency isn't relevant.
What to know:
In real estate, the "title" is the legal right to ownership of the property. The title changes hands every time a property is bought and sold. During the closing process, a title company conducts a title search of public records to ensure that the seller has the rights to sell the property and that there are no other claims to it. In short, the title search makes sure the seller is legally able to sell the property and that no one else can claim it after the sale.
A title contingency, therefore, is a clause in the contract that ensures the buyer can back out of the contract if the title search throws ownership of the property into question.
When to waive: Lenders will not close a loan if the ownership of the title is in question, so it won't be possible to waive this contingency with traditional financing. Even with a cash offer, it is not advisable to skip the title contingency since no buyer should be willing to purchase a home without a clear title. Note that a title contingency is not the same thing as title insurance (which provides remedies if the initial title search missed something and another party lays claim to the property later down the line).
What to know:
A home insurance contingency requires the home buyer to apply for and secure homeowner's insurance before the sale can complete.
This contingency may be added by the mortgage lender as one of the terms of the loan -- in other words, they will not issue a mortgage loan until the buyer has homeowner's insurance.
A home insurance contingency can also be requested by home buyers. If the home happens to be in a state at high risk for certain hazardous conditions (like hurricanes, fires, earthquakes, etc.) some insurance carriers may flatly refuse to issue homeowner's insurance. This contingency allows the buyer to walk away from the deal and keep their deposit if they're unable to secure an insurance policy.
When to waive: Even if you've been doing a ton of research on home buying and real estate contingencies, you may not have heard of this one. This is a pretty typical requirement for home buyers and not something that would be considered a stumbling block. Most mortgage lenders will not issue you a loan in the first place if you don't have homeowner's insurance to protect your investment (and their collateral) and there's no reason to waive this contingency.
What to know:
This contingency is generally only used by real estate wholesalers and investors. Investors agree to purchase a property, then sell them to another investor at a wholesale price.
The "right to assign" contingency allows the investor to back out if they can't find another buyer for the property, for whatever reason.
When to waive: As an everyday home buyer this contingency isn't something that would come up in your home-buying journey, even if you're buying another residential property to rent out for income purposes.
As you can see, there are common contingencies you can waive if you're making a cash offer, common contingencies that you may choose to keep to protect yourself, and any number of obscure contingencies you might write into an offer for very specific and niche needs.
But the more contingencies an offer carries, the less attractive it is to a seller because these contract riders can slow down and even completely derail the home purchase. That's why removing the financing and appraisal contingencies with an all-cash offer is one home-buying strategy that is sure to give you a competitive edge over other buyers.
Learn how getting Cash Approved brings you one step closer to moving into the home of your dreams!
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