What You Need To Know About Waiving Contingencies

It’s no secret that most buyers who are prevailing in extreme multiple-offer situations are submitting contracts that have no contingencies. That means there are no conditions, and that if a buyer changes his or her mind and backs out, there are no “safety nets” that guarantee the deposit money will be returned.

When you have an offer accepted by a seller, the first thing you do is submit your deposit to the title company. This is typically a sum of 3% of the purchase price, and the deposit is the good faith money that covers the seller for what’s known as “liquidated damages.” If the buyers change their mind about the purchase for a reason related to one of the contractual contingencies, the deposit can rightfully be returned.

However, if there are no contingencies and the buyers back out, the deposit can technically be retained by the seller for the aforementioned liquidated damages. The primary contingencies in a transaction are inspections, loan, and appraisal.

So if you’re waiving one or all of these primary contingencies, here’s what you need to be aware of:
Appraisal. The lender will require that an appraisal be done to confirm that the value of the property is at least what you’re paying for it. If an appraisal comes up short—and that’s happening these days—you can either negotiate the difference, agree to bring money in, or cancel the contract. However, if you have no appraisal contingency, you will be on the hook for bringing in the difference between the price you’re paying and the amount of the appraisal. If you’re waiving the condition, it’s important that you have enough cash at your disposal to cover the shortfall.

Loan. The lender needs to approve your financial details, as well as those of the property. If your lender finds exception with any details and decides against lending on the purchase, you can either pull out or find a new lender. But if you don’t have that loan contingency, your deposit money will be at risk. Buyers waiving the loan contingency either have a very large down payment, or they’ve had their file pushed through underwriting to minimize risk.

Inspections. Typical inspections buyers in San Francisco conduct when purchasing property are general contractor and termite. Waiving inspections to compete is not typically advised. Sometimes sellers provide pre-sale inspection reports, which are useful, or buyers do their own pre-inspections if they really intend to compete on price aggressively. If you decide to waive inspections, that means that you are willing to absorb the risk of a post-escrow discovery that may have been avoided had you had the inspections.

If you’re thinking about waiving contingencies on a purchase, discuss the ramifications with your Realtor or lender. Above all, you need to be aware of and comfortable with the risks involved.

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Eileen Bermingham

Corcoran Global Living



DRE# 01352627

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