In our current, hyperactive market, competition causes a substantial number of buyers to waive contingencies to make their offers appear stronger. There are dangers to this practice that are not always understood by buyers, sellers and even some of the agents representing them. Ignorance, however, will not protect you from subsequent problems.

Buyer’s contingencies in writing

A contingency written into the contract is generally designed to protect the buyer. It signals to the seller that the buyer needs to do certain things in order to buy the house. Written contingencies have time frames in which they must be removed.

The two most common contingencies are inspections and financing, but many others are possible. Buyers are entitled to comprehensive inspections of the home and grounds so they can be aware of any problems and how to handle them. 

The majority of buyers need to borrow money from a lender. A loan contingency means the buyer and property must be approved for a loan or else the sale cannot be completed.

Contingencies in reality

A buyer might need a bank loan even though this was not stated in his contract. This is called a contingency “in fact,” or a contingency “in reality.” 

Buyers’ agents commonly write offers without a financing contingency, even though the buyer obviously needs a loan. The justification is the accompanying pre-approval letter, which indicates, subject to an appraisal of the property, the lender has approved the buyer. 

Likewise, some real estate salespeople advise their buyers to omit an inspection contingency. Ostensibly, this is a strong offer because it is contingency-free. Nevertheless, further examination shows most of these to be Swiss cheese.

Dangers to buyers

Waiving an inspection contingency without the benefit of your own, thorough inspections is very risky. You might be paying a premium for a home with serious deficiencies that you do not have funds to fix. 

Even if you have a pre-approval letter, this is not a 100% guarantee that the lender will grant you the loan. By not having a financing contingency, you are telling the seller that you can and will come up with the money necessary to close even if your loan is denied. This is equally true if you need proceeds from the sale of another property and have not written this as a contract contingency. Do not be so naïve as to think you will not be held personally responsible if you cannot perform. 

In order to be competitive, buyers are encouraged to submit large deposits. Three per cent of the purchase price is common; higher amounts are not unusual. A buyer who has contingencies that were not written into the contract needs to be concerned about being able to retrieve his deposit if the escrow does not close. Additional penalties could also be assessed to the buyer, depending on contract language.

Dangers to sellers

If this market goes south, buyers at some future date may be upset at the difference between what they paid and the diminished value of their home. History has shown that some of these buyers will search for wrongdoing in the transaction. 

One possibly fruitful area could be failure of the seller and agents to ensure the buyer had a sufficient opportunity to fully inspect the property. If he later discovers costly problems, the buyer might claim he wanted inspections, but was coerced into not getting them in order to have a chance of buying in competition. I recommend an inspection contingency in contracts for buyers, regardless of the number of other offers. 

Similarly, I strongly encourage my sellers to insist that the successful bidder on their home have an adequate chance to perform inspections. I tell buyers’ agents who write offers on my listings that if they do not include an inspection contingency in their contract, I will add it in a counteroffer.

Likewise, buyers should have a written loan contingency unless they can provide substantiation of the source of all the funds needed to close the transaction. I counsel my sellers not to rely on a pre-approval letter as proof positive that a loan contingency is not needed.

I explain to sellers that, even if the buyer has omitted a loan contingency, having one for an appraisal amounts to the same thing. This is true even though the buyer’s agent presents it as an offer that does not need loan approval.

In fact, the house still needs to appraise for full price unless the buyer has put down more than 20 per cent of the purchase price. If not, the buyer can cancel and is entitled to have his deposit refunded.

Final thoughts

In an auction-like atmosphere, buyers and their agents will go to great lengths to get their offer accepted. Contracts represented as contingency-free, often are not. As a buyer or seller, you need to know the difference.

The most professional Realtors have the experience and knowledge to help you distinguish a solid written agreement from a shaky one. Make sure to choose an agent who will not let you be the victim of what is unstated in the contract.

Related Articles: Multiple Offers, Part 1 and Part 2; and Condition is Critical