San Francisco Chronicle - (Sunday)
Tempted to waive contingencies to score a home? Be careful
In a white-hot market, you may feel pressure to make some concessions to win over a seller — and, no, we’re not talking about sending a basket of banana-nut muffins. When you make an offer on a home, it’s standard to throw in some contingencies — telling the seller that if the home isn’t up to snuff for a variety of reasons, you have the right to walk away from the deal — with all of your cash in hand.
That’s all hunky-dory in a buyer’s market. But in a competitive climate where sellers have the upper hand, buyers are increasingly waiving those contingencies, or protections, in order to speed the deal through to closing.
You want the house, and the seller doesn’t want any hiccups. So getting those pesky contingencies out of the way is a win-win, right? Of course not!
It’s riskier to waive some contingencies than others. We set out to discover which are the most innocuous of the bunch — and which are the most terrifying. We asked an expert to discuss the pros and cons of each common contingency, and then we ranked the risk factor of waiving it on a 1-to-5 scale, with 5 being the highest. Remember — these aren’t hard rules. Everything depends on your local market, your personal situation, and, above all else, your tolerance for risk.
Contingency: Financing Fear factor: 4
This contingency gives you the right to back out of the deal if your home financing falls through. And waiving it can go very, very wrong.
That’s because any number of things could happen before your loan’s been sent through underwriting. The lender could decide to lower the total loan amount, spike the interest rate, disqualify you from a certain loan, or a myriad of other “oh crap” situations. If you’re locked into a home offer and can’t hold up your end of the bargain, you could lose your earnest money.
But not every buyer needs to worry as much about financing. Say, for example, you’re paying in cash. You won’t need the lender, so you won’t need this contingency.
And if your credit is spotless, you’re making a solid (at least 20%) down payment, and you’ve had the same good job for a while, you’re also in a better position to take this risk.
Bottom line: Talk it over with your Realtor and mortgage broker and find out just how confident you should be in your financing. But keep in mind: Even with a pre-approval letter, things can still go awry in the final lending stages (including the appraisal — see the next item). That’s why we’re rating this one high on the risk radar. Contingency: Appraisal Fear factor: 3
An appraisal is required by most lenders, and it can be useful to buyers trying to negotiate a price. But appraisals can be tricky.
That’s because a number of factors can affect the outcome of an appraisal: the appraiser might rely heavily on the value of comparable homes that sold for mysteriously low prices, or perhaps he saw the house in less-than-ideal conditions.
And especially in a hot market where homes are selling for inflated prices, the appraisal value might not match your expectations — but you still won’t get a discount.
“Sometimes the market — that is, the price a buyer and seller agree to—isn’t the same number as what an appraiser thinks it’s worth,” Wethman says.
Bottom line:
If you’re looking to woo a seller, you might want to skip the appraisal contingency, especially if you think it won’t change
the asking price of the house. But be careful — your lender may not agree to a loan over the appraisal price, leaving you to foot the remaining cost of the home.
Because it could go either way, we’re placing the risk level squarely in the middle.
Contingency:
Home inspection
Fear factor: 4
The right to get a full, professional home inspection — and flee into the night if new and horrifying info comes to light — is a crucial contingency.
Without a licensed inspector viewing the property, you can only guess what might be potentially wrong with the home, now or 10 years down the line.
By waiving this contingency, you lose the right to make any requests for additional repairs — or to run away — before the deal closes. This is scary stuff, people. Nobody wants to be stuck in a money pit.
If you’re still convinced waiving this contingency is the only way to win the seller’s heart, try finding some neutral ground, Wethman says. Like a general inspection contingency, which gives you the right to void the contract, but not to ask for repairs.
Bottom line: Unless you know you’re getting a fixerupper and will have to make repairs anyway, you’re gambling big time by waiving this one.
Contingency: Clear title Fear factor: 5
If the opportunity arises to waive this one, it’s time to run for the hills. Abort mission. Just say no.
You may not be able to waive a clear title search in your area — in some parts of the country, it isn’t even legal. But if you discover you can, don’t.
A title search will churn up all kinds of important info — like who actually owns the home and if there are any liens on the property. It might seem far-fetched, but title problems happen all the time. Waive your right to it, and you might find that along with your new home, you’ve acquired thousands of dollars in liens.
“Personally, I would never waive this even if it was an option,” Wethman says.
Bottom line:
Seriously, the risk is high.
Don’t forget to ask your Realtor’s advice before you waive any contingency. All deals are unique, and only a pro who knows you and the market can tell you how to strike the best deals to score your dream home.
Contingency: Early move-in Fear factor: 2
Closings can be delayed, so many buyers ask for the right to move in their possessions (or themselves) early. But it isn’t something sellers or seller’s agents love.
“I would never allow my sellers to agree to it,” says Katie Wethman, a Realtor with The Wethman Group at Keller Williams Realty in McLean, VA. “There are just too many unknowns if the deal doesn’t close.”
And those unknowns go both ways.
If you move in early, you’ll lose some of your negotiating power. After all, it’ll be much harder for the seller to believe you’ll walk on the deal if you’ve already moved all your stuff in. And if the deal falls through, you’ll face eviction from the seller and scramble to find a short-term living arrangement.
Bottom line:
Moving in early could potentially do more harm than good, so waiving this contingency has minimal risk.
Contingency: Homeowners association rules
Fear factor: 1
The homeowners association rules contingency lets you get out of the deal if you discover the restrictions don’t jibe with your lifestyle (say, they won’t allow you to have three Rottweilers or paint your front door eggplant).
Let us be clear: We do not recommend getting to this point on your path to homeownership without asking about the basics of the home you’re trying to buy — including HOA rules. Ask for a copy and read it before making an offer.
Bottom line:
Since we think you should do your homework, waiving the HOA contingency seems pretty low-risk.