Do you have to remove your contingencies to be competitive in the Bay Area real estate market?
In real estate, contingencies are defined as conditions that need to occur in order for the transaction to push through. As the buyer, you have the option to include contingencies in your contract. However, a number of home-buyers think that they should remove these contingencies altogether to make a more competitive offer.
In this video, I will be talking about three of the most typical contingencies you need to focus on when you’re writing an offer in East Bay, and how you can possibly shorten or remove them.
3 Major Contingencies:
1. Physical Investigation Contingency
From its name, this contingency allows the potential buyer to investigate and inspect anything that might affect the condition, value, and desirability of a property.
If that sounds broad, it’s because it is! This is the broadest of all contingencies and it allows the buyer to turn every stone to get a full and detailed picture of the condition of the home. They can even hire any investigator or look-up city records. Then, they can use all their findings to negotiate credits or repairs with the seller, putting the buyer behind the wheel of the sale, which is why sellers don’t like this contingency.
In our market, this is also the reason why sellers decide to do their own inspections and investigations upfront. They want to be able to control the narrative around the condition of the home and hope that the buyer accepts the condition as is, leaving less wiggle room for negotiations.
If you’re a buyer and are considering writing an offer without this contingency, my advice to determine if you can responsibly remove it. To do this, you must read through the disclosure packet front-to-back with your agent. You are looking for what disclosures were made but also who disclosed it, how reputable they were, were there remedies taken, and were there permits pulled in the past?
If you can build a very solid picture of the condition of the home through the eyes of the seller AND reputable inspectors, then you might have a case to responsibly remove this contingency. Otherwise, you may end up paying move-in ready prices when a lot still needs to be fixed in your home.
2. Loan Contingency
If you’re writing a cash offer, you obviously won’t be needing this contingency. However, if you’re planning to apply for some kind of financing, then this contingency will come into play.
In general, this contingency allows you time to apply for and receive a loan in order to purchase the home. You can also make the contingency narrow and tight. For example, you can essentially say “If I don’t get an interest rate below 3.5%, I’m out.” You can also leave it blank which effectively means “If I can’t get any loan, I’m out.” You don’t want to do the latter as that opens you up to major liability.
To be able to confidently remove this contingency, what you can do is get yourself pre-approved as I’ve mentioned in my first-time home-buyer mistakes video. If you do this, you get to show the seller that you’re financially qualified and really serious about closing the deal too.
3. Appraisal Contingency
This contingency allows you to get an appraisal of the value of the property from a third party independent person. This helps you make sure that the real value of the property is equivalent to what you’re going to offer.
Keeping this contingency in place puts you in a position to potentially negotiate with the seller to lower the price, depending on the outcome of the appraisal. In contrast, if you remove this and got a low appraisal, you’ll be on the hook to make up the difference between what they said the value is and what’s in your contract for, especially if you applied for financing.
For obvious reasons, sellers want you to release this contingency. As much as possible, sellers want to close the deal at the offer you wrote and not at a lower price because of an appraisal. Thus, to be able to responsibly remove the appraisal contingency, what you must study the market data. You have to understand the ins and outs of the neighborhood, what sold recently both on and off market, and what other things support the property’s value on a price per square foot basis.
The effect of Covid-19 on the appraisal of homes
With this new market, a number of houses will obviously be seeing appraisal issues since banks and appraisers are becoming more conservative. With this in mind, you need to make sure you’re very comfortable with prices going down in case you find yourself in an appraisal issue.
As a summary, if you’re buying from the East Bay, be sure to have a very sober and frank conversation with your real estate agent about these three most common contingencies. Make sure not to remove them just to make a competitive offer. Also, be sure that you’re really responsibly shortening or removing them if in case you do.
I hope this list has helped you. If I can give you more context on the process of buying your first home, please do not hesitate to reach out. My information is below.
Here’s to all your success!