House hunting can be stressful. Add many bidders for the home you want, and you get an emotional rollercoaster. If the house has more than one bidder, it’s time to think about how you can make your offer more attractive to the seller.
Most home sales begin with a list of contingencies. The buyer who waives them ends up looking appealing but also takes on more risk. As a buyer, be careful about waived contingencies because not all of them work the same.
What are contingencies in real estate?
Contingencies protect the buyer by defining the conditions required for the sale. If those conditions aren’t met, the buyer can legally walk away from the sale. They also help bidders avoid buying a house with severe defects.
Buyers should talk to a real estate agent about contingencies before making an offer. Decide with your realtor which ones you should waive if any. There are three main types of contingencies we’ll talk about later.
What is a contingent offer?
A contingent offer is an offer made on a property that includes contingencies. These contingencies must be met before a real estate contract becomes binding. A buyer puts these conditions in place to be able to walk away from a transaction and get their earnest money back.
76 percent of home sales have contingencies, so they’re very common. They allow a buyer to walk away from the sale if they can’t get financing, the house has defects, or if it appraises low.
Although contingent offers are a smart move, they can hold up the sale timeline. If a buyer makes an offer with fewer contingencies, it will be more attractive to a seller.
Types of contingencies
There are three major types of contingencies in real estate. They all protect the buyer depending on their situation.
Appraisal contingencies are used when the buyer needs a loan to buy a home. Most mortgage lenders require an appraisal before they agree to lend you money. If the appraisal finds the home value is lower than the buyer’s offer, the buyer must pay the difference in cash.
An appraisal contingency allows the buyer to back out if the lender finds the home’s value to be less than the offer amount. If this contingency is waived, the buyer is locked into their offer and has to come up with the difference.
Home inspection contingency
The home inspection contingency gives the buyer the right to have a home inspection done and use the results to make their buying decision. Based on the state of the home, the buyer may negotiate repairs, ask for a lower price, or walk away from the sale.
The buyer must specify what kind of inspection the offer is contingent on (general, mold, termite, etc.). To make it easier on the seller, the contingency may say you’ll overlook any individual repairs that are cheap. Or it may say that the inspection contingency only applies to big issues like foundation, plumbing, or mold.
If you waive a home inspection contingency, you may not be able to have an inspection done. It’s possible to negotiate for the right to do an inspection for fact-finding purposes. Buyers won’t be able to walk away because of these inspection results unless fraud has happened.
Buyers include a financing contingency in a contract when they pay with a mortgage. A finance contingency allows them to stop the deal with no repercussions if they can’t secure the funding.
Financing contingencies are common in real estate. They only take the buyer’s financials into account, not the property or its value.
Buyers who waive the financing contingency can face serious financial risks. This includes forfeiting earnest money, having to buy the property even if they can’t secure financing, and legal action.
Other less common contingencies are sometimes used in a home sale.
- Homeowners Association (HOA) contingency: you can walk away from the deal if the rules of an HOA are unfavorable.
- A use and occupancy clause: allows a buyer or seller to occupy the property outside of closing. In some cases, a seller may want to stay on the property after the closing date. Likewise, a buyer might want to move in before the close date.
- A home sale contingency: allows a buyer a specified amount of time to sell their home. If a buyer can’t sell their home during that time, they can rescind their offer and get their earnest money back.
When do you waive contingencies?
Contingencies are generally standard in the offer you make on a home. They stipulate that you will follow through and pay the seller the agreed-upon amount based on your conditions. Your real estate agent will help you decide if it’s a good idea to waive any of them.
Waive an appraisal contingency
A buyer should waive their appraisal contingency only once they talk to their realtor and are sure their appraisal will not be low.
Most home sales depend on a loan where the lender needs to determine the value of a home before issuing the amount. A good realtor usually will advise against waiving this contingency.
If you aren’t trying to buy the home through a loan that requires an appraisal, you likely don’t need an appraisal contingency. Still, a home buyer should always consult with their real estate agent before waiving contingencies. It is not a good idea to waive an appraisal contingency if you require a mortgage.
Waive a home inspection contingency
A buyer takes on a lot of risks if they choose to waive their home inspection contingency. If their home needs big repairs, it could cost tens of thousands of dollars that they didn’t budget for.
A home inspection contingency is one of the most often waived conditions. This is because details of the home’s condition may already be publicly available or accessible through the seller. Waiving a home inspection also doesn’t impact their ability to get financing.
Skipping a home inspection could make you more attractive to a seller, but it may mean big financial liability. This is generally not worth the risk unless you have the means to cover substantial repairs.
As an alternative, you can change the contract language to manage risk and be an attractive buyer. This could mean altering the contingency so you only walk away if major issues are found, like in the foundation or plumbing.
Waive a financial contingency
You need a financial contingency only if you are financing a home. Most experts don’t recommend removing the financial contingency unless you pay cash.
Waiving a financial contingency can invite legal issues if you can’t pay the offer you made. Some buyers may think that their pre-approval letter means their loan is guaranteed. This is not true, there are factors that can prevent you from getting a loan even if you are pre-approved. Waiving a financial contingency and not being able to secure a mortgage means you’ll lose your earnest money and invite a lawsuit from the seller.
The final word on waived contingencies
Every contingency has different factors to consider before waving it. The decision also depends on a buyer’s unique situation. If you have concerns, work with their realtor before making any decisions about their contingencies.
Frequently asked questions about waived contingencies
How do sellers view contingencies?
Most home sellers are familiar with contingencies involved in the process. Contingencies make the sales process longer, which is generally not what a seller wants. Buyers who are willing to waive their contingencies are usually more attractive, even more than a higher offer if they need to sell quickly.
As a home buyer, you shouldn’t push the due date of these contingencies too far. A seller could think that you are not serious, making them more willing to accept other offers.
Why waive your contingencies?
The buyer with the highest offer has the best chance of securing the home. But when that offer comes with contingencies, a seller looks around for an offer that is the least likely to fall through. In some cases, it means accepting less money.
Every contingency could delay the sale, and the seller loses money during this time. You can consider waiving certain contingencies to make yourself the most attractive buyer by saving them time. Try not to act on emotion and waive all your contingencies to get your dream home.
What’s the downside of waived contingencies?
Remember that waiving contingencies means you’re taking on financial and legal risk. Waiving contingencies can help a buyer, but it can trigger a bidding war if everyone starts doing it. Ask your realtor or lender what contingencies you should waive to close the deal.