In the simplest terms, contingencies are conditions in a real estate contract. They come in different forms: financial, appraisal, and inspection, among others. They aim to protect buyers against other bidders.
Contingencies have risks. Most real estate investors understand the effects of waiving contingencies, but this may be a whole new concept for some buyers. Before you decide to skip any contingencies, let's go through some of their aspects and how they work.
Waiving the Inspection Contingency
An inspection contingency allows for a few days to conduct a house analysis. It paves the way for you to learn the defects and repair costs for a house before negotiating the price.
Waiving this contingency can be risky, especially when buying an old home or if you intend to rent out the property. As it is, 20% of home buyers waived inspection contingency in December 2021, down from a 27% peak in July of the same year.
Consider the following before making a move:
- Your budget: do you have ample resources to address significant repairs?
- The house's interior and exterior conditions will determine if the cost will shoot up or remain constant
- Your team: get an opinion from your most trusted contractor to avoid issues. Also, check the seller's disclosures to affirm there are no red flags on the property
Waiving the Financial Contingency
A financial contingency protects homebuyers. It doesn't pose many risks to the seller, especially if the transaction will all be in cash. If you intend to pay for the house through a mortgage loan, ponder on:
- Down payment and the loan amount: the lower your down payment, the higher the loan you'll need, which increases the chances of a fall through
- Rapport with the mortgage lender: if you've been using the same lender for a long time, then waiving the financial contingency could be a wise move
- Financial strength and loan requirements: the higher your credit score, the safer and better waiving financial contingency will be
- Options if the loan fell through: if you have other ways to purchase the home besides using a mortgage loan, waiving this contingency is harmless
Waiving the Title Contingency
In essence, a title contingency enables you to buy a property with a clean title deed. You can exit the deal if there is a foreclose dispute on the ownership or a short sale. Whatever the case, waiving the title contingency is often unwise.
A title contingency is uncommon. It is often resolved before closing the deal but doesn't scrape out all the risk. If issues pop up, you could end up losing money or the property.
Waiving the Appraisal Contingency
Waiving the appraisal contingency is worthwhile, despite its share of offers dropping from 23.1% in March to 15% in April 2020. If a property's value is less than your offer, an appraisal contingency lets you abandon the deal.
Most lenders will refuse to loan you the full cash amount unless the house appraisal is clear. More so, if you waive the appraisal contingency but the assessment value was wrong, you could be in for a huge cash fix.
- Whether you have cash for makeovers if the property appraisal is low
- If the house's market is consistent and stable for a later resale
Waiving Other Contingencies
Besides the mentioned contingencies, other common clauses include:
- Homeowners Association (HOA) contingencies: they let you walk out of a deal if the HOA policies are unfavorable to you
- House sale contingencies allow you to leave a deal by a specific date if you can sell your current home
- Move-in contingencies: they let you occupy a property regardless of when you close the deal
- Rent-back contingencies: they allow the seller to lease the house to you until they find a new property
Despite waiving contingencies being helpful to homebuyers, they can pose the risk of starting a bidding war. They can even lead you to lose a property in a reseller's market. To be on the safe side, reach out to a local lender for advice on the best contingencies before closing a house purchase deal.