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Making Contingency-Free Bid Carries Risk
The housing market in some California communities is so competitive that some buyers have been making contingency-free offers to render their bids more attractive to sellers.
Normally a residential purchase offer, also called a purchase contract, includes contingencies to protect the buyer. A contingency is a condition that must be satisfied for the sale to close. Typical contract contingencies are for financing, inspections and the sale of another property.
Buyers who try to satisfy a contingency but can't are usually released from the contract without penalty. For example, suppose the buyers' contract includes a financing contingency. The buyers try diligently to get approved for a mortgage, but are repeatedly turned down. In this case, the buyers' deposit money will probably be returned to them.
A contract contingency should have a time period for the contingency to be satisfied. Contingency time periods are negotiable between the buyer and seller, so they will vary from contract to contract, although local custom often sets a precedent.
Typically an inspection contingency runs from 10 to 14 days following contract acceptance. Financing contingencies can run as long as 30 days and a contingency for the sale of another property might be even longer.
It's understandable that sellers prefer offers that aren't loaded with contingencies. A contingency gives a buyer a way out of the contract, often without penalty. But when a buyer backs out of a contingency-free contract, the sellers may be entitled to keep the buyer's deposit.
It's risky to make a contingency-free offer. For instance, it's not a good idea to buy a home without having it thoroughly inspected by qualified professionals. If you waive an inspection contingency and later find defects, you may have no recourse against the seller. If this is the case, you'll probably have to pay to correct defects yourself.
It's tempting to leave contingencies out of your offer when you're competing against other buyers, particularly if you have lost out in competition before. Under certain circumstances, it may be reasonable to take the risk.
For example, pre-approved buyers might feel comfortable making an offer without a finance contingency because they have already been lender-qualified for a mortgage.
However, by waiving the financing contingency, pre-approved buyers do take the risk of the property not appraising for the purchase price.
If the appraisal comes in low, the buyers will either have to come up with the additional cash required to close the deal, or they could lose their deposit to the seller if they back out of the deal.
If recent comparable sales support the purchase price, the risk of the property not appraising is probably low.
You can reduce the risk of waiving an inspection contingency by having the property inspected before you make an offer. Be sure to get the seller's approval before taking this approach. Some sellers have pre-inspection reports. If so, read them and discuss any questions you have with the inspectors who prepared the reports before you make an offer.
Buyers who need the proceeds from the sale of another property to close on the new home should line up interim financing before making a noncontingent offer.
This is advisable even if the other property is sold, but not yet closed. If you make a noncontingent offer and the sale of your other property falls apart, you could lose your deposit if you can't close on the new home.
A more cautious approach is to include necessary contingencies in your contract, but shorten the contingency time periods.
* * * Dian Hymer is a syndicated columnist and the author of "Starting Out, The Complete Home Buyer's Guide," (Chronicle Books, Revised 1998.)