Buying a home is a significant investment… probably one of the most important investment decisions a person or family can make. The process of buying a home can oftentimes feel stressful and complicated. Today, especially in California, the real estate market is highly competitive thanks to compressed inventory conditions. Thus, waiving contingencies in an offer has become more prevalent (and almost a necessity in multiple offer situations) as buyers have sought out ways to submit more attractive offers to beat the competition.
There are two primary types of contingencies:
- Investigations - this includes obtaining inspections, review of seller disclosures, review of any reports provided (sellers often will have inspections done before putting a home on the market), review of HOA documents, review of title reports, obtaining insurance, etc.
- Financing - this includes the loan contingency and the appraisal contingency.
Waiving contingencies in real estate has advantages and disadvantages:
Pros:
- Competitive advantage: By waiving contingencies, you can make your offer stronger to the seller, especially in situations where multiple offers are present.
- Faster, more streamlined closing: Sellers almost always prefer fewer, faster or no contingencies because this reduces stress as it limits the number of ways buyers can cancel the sale and/or allows for a faster closing process.
- Shows commitment level: By waiving contingencies a buyer is essentially telling the seller they are committed to buying the property which could lead to fewer surprises. Sellers like this.
- Negotiating leverage: By waiving contingencies, you might be able to negotiate a lower purchase price as the seller doesn’t have to worry about contingencies and/or further negotiations after inspections or appraisal.
Cons:
- Lack of information: By waiving inspection contingencies, you're essentially agreeing to purchase the property regardless of its condition. If there are any issues that arise after the sale, you'll be responsible for fixing them at your own expense. Note: it is becoming more customary for sellers to obtain inspection reports before going to market in an effort to reduce the likelihood of a sale falling through.
- Financial risk: Buyers who are fully pre-approved by their lender with large down payments often consider waiving their loan and appraisal contingencies because even if the home appraises for less than the contract price, the buyer can simply pay the difference. This is especially common in multiple offer situations. But, if a buyer’s down payment is just enough to obtain the loan, waiving the loan and appraisal contingencies can become a problem if the appraisal comes back for less than the offered purchase price and/or the bank makes a change to underwriting requirements. Waiving the loan contingency, generally, is the more risky of the two. Backing out after removing ALL contingencies places your deposit in jeopardy. Note: if you are getting a loan, lenders almost always also require a formal appraisal as a condition of financing.
- Legal Concerns: If you waive contingencies you could face potential legal implications (such as zoning or title issues - although you can research many of these issues before making an offer).
Ultimately, the decision to waive contingencies in a real estate deal should be made in consultation with a qualified real estate professional, who can help you weigh the pros and cons and allow you to make an informed decision you feel comfortable with when presenting in a purchase offer.
