At some point in the home buying process, you’ll be ready to make an offer. This offer you make will include both your offering price and a set of legal clauses called contingencies. Sales price alone does not determine how appealing or unappealing an offer is. These contingencies you include will be just as important. Dropping one or more can make the difference between an accepted offer or the seller going with someone else.
Contingencies come in different forms and will indicate specific terms that will need to happen for a real estate deal to move forward. Their purpose is to protect the buyer if something goes wrong, and they have to exit the agreement. Below are the five most common.
Should My Offer Include any Contingencies?Should My Offer Include any Contingencies?
When making an offer on a home in NYC, it’s not always about the price. That’s certainly important, but it’s not everything. Another way to sweeten the deal and get your offer accepted, despite your offer being lower than other buyers, is by making a non-contingent offer. Read on to find out what this is and why you should weigh the decision carefully before making one.
What is a Contingent Offer?What is a Contingent Offer?
Most real estate purchase contracts will include a clause that makes the sale contingent on specific factors. It can be a mortgage contingency that makes the closing reliant on the seller’s first approval for a mortgage. It can be a home selling contingency in which the deal relies on the buyers selling their current home first. Or it can be contingent on specific actions being performed; by the sellers. For instance, appropriate repairs must be completed first before the deal can go ahead.
Whatever the exact details, the contingency is there to protect the buyer’s down payment. If anything happens, which causes the deal to fall through, the buyer gets their full down payment back.
Making a Non-Contingent OfferMaking a Non-Contingent Offer
A non-contingent offer is when a buyer agrees to buy without performing any due diligence on the property or making the deal contingent on any outside factors. This can be very risky because if something goes wrong, you could lose your entire down payment. If the sellers have multiple bidders, they may insist on non-contingency contracts. It’s easy to understand why. It provides certainty that the buyer will buy at the offering price. Such is not ideal for buyers unless fully confident that they can qualify for a mortgage or pay cash. Making a non-contingent offer can put you above other home buyers whose offers have contingencies.
Imagine this example. A seller has just listed their property for $500,000. After a few days, they receive two offers. The first is for $500,000 but includes a contingencies clause, which makes the deal reliant on the buyer first getting mortgage approval. The second offer is for $490,000 but consists of no contingencies. Which do you think has a better chance of being accepted?
Most people will choose the second offer with no contingencies. If you can make a non-contingency offer and have either a mortgage pre-approval letter or all the cash on hand, you can significantly increase the chances of your offer being accepted. The sellers have the assurance that there will be no unexpected roadblocks that can derail the deal once terms; have already been agreed upon.
It can be riskyIt can be risky
However enticing this might be as a way to get your offer accepted, it, of course, carries a lot of risks. If you sign a non-contingent contract and something goes wrong, you stand to lose most if not all of your down payment. Before making such an offer, you should discuss it with your attorney and have them review the offering plan, the building’s insurance, and the last two years of your financial history. If they inform you that the building is in bad shape or that you could have problems getting approved for a mortgage, DO NOT sign the contract.
If the deal falls through, it’s not useful for the sellers either. On signing the contract, they will have taken the property off the market (probably losing the opportunity of signing with someone else) and wasted precious time. The buyer and their attorney will face a very tough uphill battle to get any of the down payment back. Non-contingency offers are great for getting above other buyers, but only when you are confident that there will be no roadblocks that could derail the deal.
Common Contingencies To ConsiderCommon Contingencies To Consider
Home InspectionHome Inspection
Of all the contingencies, the home inspection contingency is most common. It’s there to protect the buyer and allow them to get the full picture of the home they intend to purchase. One or more professionals will be brought in to inspect various parts of the property. Once the buyer has these reports, they’ll be able to negotiate with the seller on repairs or remediations if needed. If no agreement; is reached, then the buyer is free to walk away from the deal.
When buying a co-op or condo apartment, the inspection contingency is usually not needed. The common areas, walls, and roofs will be the responsibility of the building to maintain. With so many apartments in each building, this maintenance charge is usually inconsequential. However, it’s always better to include it if you doubt or are buying a resale.
Mortgage FinancingMortgage Financing
Those buyers who need financing to complete a home purchase will want a financing/mortgage contingency. This clause allows buyers to back out of a deal if they cannot secure financing for the purchase. Many first-time buyers make the mistake of thinking that just because they’ve received mortgage pre-approval, then their loan is a sure thing.
Far from the case, there is still the underwriting process to go through, which will take a closer look at their finances. If they fail to meet the requirements or something unexpected comes up, like losing their job, then the lender reserve the right to reject the loan application. The financing contingency gives buyers a safety net to get out and still be refunded their down payment.
With a loan comes the need for a home appraisal. The lender needs assurance that the property being; purchased is actually worth the amount the buyer has agreed to pay. If the home appraisal comes back saying that the property’s market value is less than the sales price, then the contract can be terminated. Some appraisal contingencies allow the buyer a specific window of opportunity to fix the problem and move forward. They must either make up the difference or negotiate with the seller to reduce the sales price. If neither of these can be done, then the contingency allows them to back out of the deal without penalty.
The title is a legal document that shows the record of its homeownership, past, and present. It will also show a record of any liens, judgments, or other issues. When going through the home buying process, a title company or your attorney will review the title before closing. Should there be an issue; This can be dealt with beforehand. However, if something; is not remedied, then this contingency comes into effect. This way, the buyer can exit the deal rather than take on a property with contested ownership or pay off someone else’s debts.
Home SaleHome Sale
When a buyer has to sell their current home to raise funds needed for a new home purchase, the home sale contingency allows them a specified amount of time to find a buyer. If they cannot, then the clause will enable them to exit the deal and deposit back. Sellers do not favor this contingency as they’ll have to take their home off the market. In such circumstance also provides little assurance that the buyer will purchase it. It’s usually taken as a last resort when no other buyer is interested. In competitive markets such as New York City, this contingency can actively work against a buyer with limited inventory.
Final ThoughtsFinal Thoughts
There are numerous other contingencies, but these are the most common types to encounter. What sellers need to keep in mind is that contingent offers to purchase can be a double-edged sword. They protect you and allow a legal way out if something unexpected comes up. But they also make your offer look less appealing to the seller.
Those like the home inspection and financing contingencies are most common, and few sellers will object to them. But as you move away from these, the less appealing you make your offer look. Your guide in deciding what contingencies to include should be the current market.