Waiving contingencies in your offer for a home

Market conditions are such that you are very likely to face competition when bidding for a house in the Seattle area. Depending on the house, you could face 10-20 other fiercely competitive offers. Only one person is going to get the house, and winning in that scenario is going to require extraordinary bid terms to prevail. In many cases, the highest offer price is going to win, but when competitive bids are similar on price, it will come down to the other terms and contingencies in your offer. Lets look at the pros and cons of waiving various contingencies to make your offer more attractive to a seller.

What does a buyer have at risk?

risk managementReal estate contracts almost always include earnest money, a deposit made by a buyer at the beginning of the transaction to show that they are serious about buying a home. Earnest money deposits vary a bit and are negotiable, usually somewhere between 1-3% of the sale price of the home. In a competitive situation, you will want to make your earnest money deposit as large as you can to compete against other bidders. On a $500,000 home, a 3% earnest money deposit is $15,000 that the buyer puts at risk.

There are various contingencies in a real estate contract. If a buyer backs out of the deal by exercising one of those contingencies, they will retain their earnest money. If they back out of the deal for something not covered by a contingency, or if they have no contingencies, the seller will retain the earnest money deposit as a penalty when the buyer backs out.

Waive your inspection contingency

Most offers for a home include an inspection contingency. This contingency allows a period of ~1 week to inspect the home. After the inspection is complete, the buyer responds to the seller, either accepting the home as-is or negotiating for repairs or credits based on what is found on the inspection. If the buyer is unhappy with the results of the inspection, they may walk away and retain their earnest money. Inspection contingencies and the resulting negotiations are often heated and difficult. Many deals fail because buyers and sellers cannot agree on what should or shouldn’t be fixed before sale. A seller is highly motivated to accept an offer that has no inspection contingency. It removes uncertainty and removes further negotiations with the buyer. There are two ways to waive an inspection contingency.

  1. Waive the inspection – You could simply waive your inspection contingency. Unless you are a home builder or have extremely deep knowledge about home construction, we never recommend this. There are simply too many unknowns and risks that can be uncovered by a thorough home inspection.
  2. Pre-inspect the home prior to offer – You can hire a home inspector prior to placing your offer and make an offer with full knowledge of the condition of the home and no further inspection contingencies. The downside is that you have to pay ~$400-$700 in inspection fees without knowing if your bid is going to win. If you are facing competitors who are pre-inspecting, you have no choice but to pre-inspect yourself, as you’ll never beat one of those offers by including your own inspection contingency. Yes, it can get expensive, but that is the cost of doing business in a highly competitive real estate market.

Waive your right to revoke based on seller disclosure form

In the State of Washington, sellers have to fill out a Seller Disclosure Statement about the condition of the property. Buyers have three business days from receipt of this disclosure to rescind the transaction. In a competitive bidding situation, a buyer should read through the disclosure and determine if they are comfortable with it or not. If they are, they may waive their 3-day right of rescission.

Waive your title contingency

All purchase & sale contracts are going to include a contingency that the seller deliver the title to the home that is clear of liens and mortgages. You would never remove this contingency, as it is critical to ensuring clear ownership of the property. However, there is an additional title contingency addendum that can be excluded that covers other potential title issues.

The title contingency addendum allows a buyer to review the title report and object to items found on the report. Those may be items that a title insurance company doesn’t have a problem with, but a buyer might. You can sometimes review a title report ahead of time, enabling you to exclude this contingency because you are already satisfied with the contents of the title report.

Waive your information verification period

The purchase & sale agreement used in Washington State allows a 10 day period for the buyer to verify all information about the listing received from the seller or listing agent. You can only back out of the transaction if you find materially inaccurate information. This is easy to waive if you do your homework on the property ahead of your offer.

Waive your financing contingency

Most offers are also contingent on the buyer’s ability to obtain a mortgage from a bank. If the buyer has such a contingency, they may retain their earnest money deposit if the lender declines their loan application.

Waiving the financing contingency is not to be taken lightly. The decision to grant a loan is solely the decision of the bank and ultimately out of the buyer’s control. That said, if a buyer has done the proper preparation with their lender by providing a full and complete financial information, it is fairly unlikely that the loan application will fail, particularly for buyers with strong income, strong credit scores and little debt.

If you are buyer on the borderline of qualifying for a mortgage, this strategy is likely too risky. If you choose this option, you must have a conversation with your lender. Tell them that you are going to waive your financing contingency to compete with other bidders and make sure they feel comfortable with your financials before taking such a risk.

Waive your appraisal contingency

The financing contingency in Washington State also includes a contingency about the appraisal. The appraisal is where a bank hires an appraiser to give them an independent value estimate of the home. The bank will make a loan based on the lower of the sale price or the appraisal price. The result of the appraisal can lower the loan amount available to the buyer, thus increasing the cash contribution required to close the deal. Let’s take a look at an example.

A buyer is purchasing a home for $500,000 and is going to do an 80% loan. The bank will loan $400,000 and the buyer must bring their $100,000 down payment to closing. The appraiser gives a value estimate of $490,000 that is lower than the sale price. The bank will only loan on $490,000, so an 80% loan becomes $392,000, which increases the buyer’s down payment to $108,000. The low appraisal doesn’t prevent the loan from closing, but it does raise the buyer’s cash contribution requirements.

The standard appraisal contingency language allows the seller a chance to get a reconsideration of value or lower their sale price when the appraisal amount comes in low. If this isn’t successful, it gives the buyer an opportunity to back out of the deal and retain their earnest money. If a buyer waives this contingency, they are required to cover any shortage based on the appraisal results,

Risk of a low appraisal varies from house to house and varies based on how aggressively buyers are bidding. If there are recent sold comparables in the same price range nearby, the risk of a low appraisal isn’t very significant. In other cases, the risk may be higher. If a buyer doesn’t have any additional cash available, they may not be able to take the risk of removing the appraisal contingency. However, if a buyer is OK with the sale price and is OK with potentially making a higher down payment on their loan, this can be waived. We have used creative terms to cap this risk by saying things like “the buyer will cover up to a $10k shortfall in appraisal value” or something similar.

Determine your own risk tolerance

Your real estate agent can help you assess the offer situation for a particular house. If bidding is hotly competitive, you are going to have to take some risks to prevail, even if some of them make you feel uncomfortable. You need to understand those risks and evaluate them against your own risk tolerance and desire to purchase this particular home. If it is the right house for you, taking calculated risks can make you the winning bidder. If it feels too risky, there will always be other homes to bid on.