Available housing inventory is still low and sellers are still at an advantage in 2022. To win a bidding war, first-time home buyers might be tempted to enter no-contingency offers. This is usually ill-advised. Contingency clauses are designed to protect buyers from purchasing a home that is physically unsafe or legally complicated. While sellers are required to disclose known problems in most states and municipalities, the extent of necessary disclosures varies. In her article “Home, Sour Home: How Homebuyers Can Avoid a ‘Lemon’” for Homelight, Melissa Holtje explains. Quoting Seattle real estate agent Ken Crotts, Holtje writes that “‘sellers have to disclose what they know about the property.’” However, sellers do not “‘necessarily have to take action to go find out more.’” As such, “‘the information you’re getting on a seller’s disclosure may or may not be complete.’” Contingencies in real estate protect prospective buyers from being blindsided by major issues not initially disclosed by the seller. Because there are no lemon laws in real estate to offer buyers recourse after a bad buy, contingencies are incredibly important. Which contingencies can home buyers waive in 2022? Learn all you need to know about waiving contingencies when buying a home. We also outline a ways to make your offer more competitive without waiving contingencies.
What Are Contingencies in Real Estate?
First-time home buyers might not be familiar with contingencies in residential real estate. For the uninitiated, contingencies are certain conditions either the buyer or seller must meet before the sale of a property can move forward. Most contingencies protect the prospective buyer from purchasing a home with an unclear title or undisclosed damage.
Contingencies are usually outlined in the purchase agreement, which sets terms for the real estate transaction between buyer and seller. This contract is drawn up after the seller has accepted a buyer’s offer.
During escrow, either the buyer or seller – depending on the clause – must meet requirements of various contingencies outlined in the contract. In some cases, the seller can fix problems to meet the contingencies outlined in their contract and prevent the sale from falling through.
What Happens When a Contingency is Not Met?
Cathie Ericson explains in her article “Contingent: A Guide To What It Means In Real Estate” for Rocket Mortgage. For example – writes Ericson – imagine the buyer makes an offer “contingent on the home inspection showing a roof life of 15 remaining years.”
In the event your inspector determines the house’s “roof only has 7 years left…an active contingency status [is] placed on the home.” Within a set period of time, the seller can either “fix the roof or adjust the price.” However, the buyer can also choose to exit the real estate contract rather than request repairs. They can do this “without penalty since they had the contingency in place.” In the event that the seller never meets these conditions, the contract is rendered void and the house falls out of escrow. Common house sale contingencies in real estate contracts include the home inspection, mortgage financing, clear title, feasibility, insurance and appraisal contingencies. Other contingencies — like the home sale contingency — are also common during the home buying process but rarely apply to first-time buyers.
What is a No-Contingency Offer?
In a hot seller’s market, competitive home buyers often feel pressured to release contingencies before placing an offer on their dream house. Waiving the appraisal contingency is most common, but waiving inspection is also popular.
Last year, buyers were willing to risk liens, insecure foundations, mold and other issues just to make their offers more competitive. In a March 2021 article for MarketWatch, Kate Wood explains why prospective home buyers took this approach. Referencing NerdWallet’s 2021 Home Buyer Report, Wood writes that “an estimated 28 million Americans” planned to buy a house last year. However, by the end of 2020, there were only “1.04 million units” available. According to the National Association of Realtors, this represents “the lowest number since the NAR began collecting data in 1982.” A combination of sky-high prices, construction pauses and record low mortgage interest rates meant that sellers had a major advantage over buyers.
Prospective Buyers Are Waiving Contingencies to Win Bidding Wars
As one can imagine, the competition amongst buyers was incredibly fierce in 2021. Unfortunately for so many buyers, “throwing money at the problem” was not enough to get one’s offer accepted. Referencing data from the National Association of Home Builders, Wood explains. She writes that “in the fourth quarter of 2020…being outbid was the most common reason buyers cited for not yet purchasing a home.” To make their offers more compelling, buyers began waiving important contingencies like the appraisal, inspection and financing contingencies. Buyers hoped that in doing so, they could skip the line and secure the winning bid. However, waiving contingencies – or entering a “no-contingency offer” – is often terribly risky. As such, it is rare that a real estate agent will recommend this course of action. While it might help you win a bidding war, the consequences could be dire. Below, we outline the contingencies home buyers should never waive and explain how to make your offer more competitive without waiving contingencies.
Which Contingencies Can Home Buyers Waive? Here Are Five Contingencies First-Time Homebuyers Should Not Waive in 2022
#1 Home Inspection Contingency
First on our list of contingencies is the general home inspection contingency, also called the due diligence contingency. This contingency allows buyers to learn about potential problems with the house not previously disclosed by the seller. Home inspections are usually limited to the structure itself and do not extend to the surrounding property.
While some buyers choose to waive this contingency, releasing this particular contingency might not be possible for you. This is because most mortgage lenders require a thorough inspection before they offer financing.
Why Do I Need a Home Inspection?
There are a number of reasons why buyers should never waive the pre offer inspection contingency clause of their purchase contract. Even in a competitive market, releasing this contingency is dangerous and could be very expensive. First, issues uncovered during the inspection could give you leverage to negotiate the terms of your offer. You might ask the seller to pay for necessary repairs. Buyers can also request the seller knock a bit of money off the asking price to cover future repairs.
Second, refusing to pay for an inspection could severely limit your financing options. As mentioned above, home inspections are usually required to secure financing like a mortgage loan. This is especially true of loans backed the government — e.g. USDA and FHA loans. Third, avoiding a home inspection could mean that you are stuck with a much bigger bill than you initially anticipated. You might spend the next few months – if not years – fighting pest infestations or getting rid of toxic mold. Buyers might also have to fix the roof or repair electrical and plumbing systems on their own dime.
In some cases, the home might not even be habitable for you and your family until after these repairs are made. In other cases, you might not be able to afford all necessary fixes and could fall into major debt.
How Do Home Inspections Work?
In her article “Importance of Home Inspection Contingency” for Investopedia, Amy Fontinelle details what to expect during and after a general home inspection. Fontinelle writes that most home inspections last “two to three hours,” during which the inspector examines “exterior and interior parts of the home.”
These include everything from electrical and plumbing to roofing and foundations. After the inspection, you and your real estate agent or broker will look over the inspector’s report. Major issues – such as those concerning the structural integrity of the house – might be too costly and time-consuming to fix.
In these cases, your lender might refuse to finance the purchase. We will discuss this further in our section on the financing or mortgage contingency.
Elements That Are Not Covered During a General Home Inspection
First-time homebuyers should also keep in mind that secondary, more specialized inspections might be needed after the initial home inspection. Fontinelle writes that most general home inspectors will not “check for termite damage, site contamination, mold, asbestos engineering problems, and other specialized problems.”
You or your inspector might suspect an issue outside the scope of a typical home inspection. In this case, hiring an inspector trained to recognize and mitigate that specific problem is your next step. Keep in mind that results of these inspections might not be covered in the general inspection contingency. You might need to expressly outline additional inspection contingencies in your contract.
What Happens If I Want to Back Out After the Inspection Uncovers a Problem?
Most inspection contingency clauses allow the buyer to back out in the event a major problem – such as pervasive black mold – is discovered. However, issues that do not impact the immediate habitability of the home might not be enough to release the buyer from their contract.
These could include a faulty HVAC system or a leaky garage roof. The NOLO resource “How to Remove an Inspection Contingency When You Buy a House” explains. Depending on the laws in your state, you might be required to “give the seller a chance to fix a problem before backing out.”
#2 Financing Contingency
Next on our list of home sale contingencies is the financing contingency – also called the loan or mortgage contingency. As mentioned above, certain issues uncovered in a home inspection might cause the buyer’s mortgage lender to refuse financing for that specific house. Last minute changes to your credit score and other unexpected issues could also cause your lender to back out.
Financing contingencies protect buyers from being locked into a real estate contract in the event their financing falls through. Writing for Forbes in her article “The Five Most Common Home-Buying Contingencies, Explained,” Tara Mastroeni explains the finance contingency in greater detail. Mastroeni writes the mortgage contingency allows you to back out “if for some reason you’re unable to receive financing.” She notes that first time home buyers often assume “that their financing is set in stone once they receive a preapproval.” However, the underwriter of your loan sets certain conditions that must be met after that preapproval.
According to Mastroeni, “if you’re unable to clear those conditions…the mortgage company reserves the right to deny your loan request.” Waiving the financial contingency could mean that you are required to buy the home even without a mortgage loan. If you choose to back out of the contract after losing financing, you might have to forfeit the down payment for your dream home.
#3 Appraisal Contingency
The appraisal contingency is the third first-time home buyers should never waive. Appraisal contingencies let the buyer walk away if the home appraises far above or below the asking price. Most lenders order an appraisal during the application process. They do so to ensure the loan amount is comparable to the fair market value of your new home.
The appraisal contingency protects the lender and the buyer from purchasing a home that will not sell near the asking price in the future. Real estate agents should be able to give you a good idea of whether the asking price is fair. However, you will not truly know until the appraiser and inspector go through the home.
What Happens When There is an Appraisal Gap?
In her article “Tempted To Waive Contingencies to Score a Home? Watch Out for These Dangerous Repercussions” for Realtor.com, Rachel Stults warns against releasing the appraisal contingency. Stults writes that your lender probably will not revoke financing.
However, your loan officer “may not agree to a loan over the appraisal price, leaving you to foot the remaining cost of the home.” The amount you owe between the appraisal value and the asking price is called the “appraisal gap.”
#4 Clear Title Contingency
First-time home buyers should never waive contingencies like the clear title contingency either. The clear title contingency is another contingency loan officers might require before issuing a mortgage. Your mortgage broker might also require you to obtain title insurance. In “How Much Are Closing Costs for Home Buyers?,” we note most buyers hire someone to conduct a title search before escrow. During this search, a title agent or real estate attorney “will go through documents related to the home’s legal history.” In doing so, they should uncover any “liens or elements that would complicate your right to ownership.” If you take a huge risk and waive the clear title contingency, you cannot walk away from the sale when a lien pops up.
#5 Insurance Contingency
Finally, we have the homeowners’ insurance contingency. This is yet another contingency commonly requested by the buyer’s mortgage lender. In his article “What Are Contingencies in Real Estate?” for Bankrate, Erik J. Martin explains. Martin writes that insurance contingency clauses stipulate “the buyer must apply for and obtain homeowners insurance on the property.”
If the buyer is unable to obtain the necessary insurance, “either party can withdraw from the contract.” While you are not required by law to obtain a homeowner’s insurance policy, your lender will likely require it before approving your mortgage.
How to Make Your Offer More Competitive Without Releasing Contingencies
There are ways to make your offer more competitive without having to waive contingencies — even in a bustling housing market. Here are three ways to improve your odds without letting go of important contingencies that protect you and your lender.
#1 Offer to Pay the Seller’s Closing Costs
First, prospective home buyers can ask their real estate broker to communicate to the seller that they are willing to pay all closing costs. While unusual, this can give the buyer a leg up on the competition.
#2 Increase Your Earnest Money Deposit
They can also increase their down payment or “earnest money deposit” to a greater percentage of the purchase price. This will demonstrate serious interest in the property.
#3 Ask How to Make the Seller’s Experience Easier
Third, buyers can ask the seller what would make their offer more competitive. If the seller prefers a quick closing, buyers can commit to a shortened contingency period. In a shortened contingency period, the real estate transaction is wrapped up quickly.
In some cases, the seller might need to delay closing until they find another home. To accommodate the seller, buyers can approve the addition of a home sale contingency to their purchase agreement.