by Aly J. Yale
Waiving homebuying contingencies can help you get noticed if you're up against a bidding war. But is it the smartest move for your investment business?
Homebuying contingencies are designed to protect you. But sometimes -- and usually in the case of a bidding war -- they can seriously hurt your chances of locking in that sale.
For sellers, contingencies just mean more risk. With a financing contingency, there's a higher chance the deal will fall through. And with inspection contingencies, huge, high-dollar repairs may crop up, eating into the seller's bottom line.
In short, a contingent offer is just not worth it if other, noncontingent bids are on the table.
For these reasons, investors are often apt to waive contingencies -- at least some of them. Unlike traditional homebuyers, real estate investors are more comfortable with the transaction process. They understand when appraisals and inspections are necessary, and they're pretty confident in their ability to get a loan (or maybe even cover the deal in all cash).
Still, that doesn't make waiving contingencies the right move -- even if it does get you the property. Are you thinking about skipping a contingency or two on your upcoming deal? Here's what you should keep in mind before you do.
Common homebuying contingencies
Before we go into waiving contingencies, let's talk about what contingencies are and how they work. At their simplest, contingencies are basically conditions in a real estate contract. They stipulate that "If X happens, then X can back out of this transaction."
There are five main types of homebuying contingencies. See below for a quick summary of what they all do:
When a bidding war is happening -- or a seller just has multiple bids for their property -- some buyers may choose to waive one or all of these contingencies from their sales contract in order to appear more attractive. As contingencies can add more risk, time, and hassle to a transaction, sellers often prefer non-contingent offers to those that come with conditions, even ones that come with a lower price point and less in profits.
Waiving the financing contingency
Most homebuyers use financing contingencies to protect themselves in case their mortgage loan falls through. Fortunately, many investors don't have to worry about this one. If you're buying the home in all cash, for example, waiving the financing contingency is a no-brainer. If you're using the same lender and the same loan product you've used 10 times this year, then waiving probably isn't such a bad idea either.
If you're not paying in cash, the decision to waive really comes down to how confident you are in your mortgage loan. Ask yourself these questions:
How much are you putting down and how much are you financing? The more the lender has to loan you, the higher the chance it will fall through.
How familiar are you with the mortgage lender and their qualifying requirements? If you're using a new lender or loan product, there's a lot more risk there.
How strong are you financially? Do you have documented, consistent income? Is your credit score high? The better your financial picture, the safer waiving this contingency will be.
What would you do if your loan fell through? If your mortgage loan didn't pan out, would you have the cash to buy the home anyway? If so, waiving the financing contingency isn't much of a risk (as long as it wouldn't drain you dry, of course).
Don't be afraid to talk to your lender if you're considering waiving this contingency. You should also consider applying for preapproval (or better yet, a fully underwritten approval) to give you even more confidence before you waive.
Waiving the inspection contingency
Waiving your right to a home inspection is a big risk, especially if you're buying an older home, a foreclosure, or any property you plan to flip or rent out to others. Without an inspection, it's impossible to know what problems lie within a home -- or, more importantly, how much time and money those problems will take to fix.
When you don't have that information, there's no way to know you're making a smart deal. What if you find wiring issues when tearing out the walls? Would that eat up your entire profit margin? What if your future renter finds black mold? Will you be liable for their medical bills? You're taking a huge risk when you can't fully assess a property before buying it.
If you're considering waiving this contingency, you'll want to think about:
The home itself: How old is it? Who were the previous owners? How well-kept does it look, both inside and out?
Your budget: Do you have the resources to address a big issue if it crops up? Would it bankrupt you?
Your team: How confident are you in your contractors if something serious arises? Do you also have a good attorney on your side in case there are legal issues?
Before you opt to waive your inspection contingency, always bring in your most trusted contractor to walk the home with you. Do they see any glaring issues? Any signs that indicate a deeper problem may be present? Don't be afraid to walk the property several times to be sure.
You should also look very closely at the seller's disclosures you receive. If there's been a lot of work done on the home, it may be a red flag that bigger issues exist on the property.
Waiving the appraisal contingency
The appraisal contingency is most important when you're financing your purchase. Because most lenders won't loan you your full sale price unless the home appraises at that number, waiving the appraisal contingency can mean you're on the hook for thousands of dollars if things don't go as planned.
For investors, appraisal contingencies are hit or miss. If you're paying in all cash, a too-low appraisal isn't going to hurt your deal. If your purchase hinges on a mortgage loan, though, you could go either way.
Ask yourself:
If the property appraises too low, do you have the funds to make up the difference out of pocket?
How confident are you in your ability to evaluate a home's value and make a right-sized bid?
Is the market stable and consistent lately in your area?
If you're financing the property and are still considering waiving the appraisal contingency clause, you will also want to look at comparable sales to determine if the home is likely to appraise. A local real estate agent may be able to help you make this assessment.
Waiving the title contingency
This isn't really one you waive (or even consider waiving). Though title issues aren't too common (and most of them can be resolved before your closing date), that doesn't mean you're completely safe. If, in fact, a title issue does crop up -- like a lien against the home, for example -- you could find yourself out thousands, or worse yet, losing the property altogether.
The risk of title issues is even higher if you're buying a distressed home -- like one in foreclosure or a short sale. If one of these properties is on your radar, waiving the title contingency likely isn't the smartest move, even if it does get you the house.
Waiving the home sale contingency
The home sale contingency basically says you can back out of the deal if your existing home doesn't sell by X date. It's typically only used by existing homeowners looking to move up and buy a new property.
As an investor, you probably won't need to worry about this one unless you're planning to move from your current home into a unit on a new multifamily property you're buying. If that doesn't apply in your place, you're safe to waive it (and probably should).
Other contingencies you may want to waive
Those are the most common homebuying contingencies, but there are also clauses you can include (and waive), too. These include early move-in contingencies (lets you move in on X date regardless of when you close), homeowners association (HOA) contingencies (lets you out of the deal if you discover HOA policies you're not happy with), and rent-back contingencies (lets the seller lease the home back from you for a certain period of time until they find a new place).
Again, these contingencies don't apply as much to investors as they do traditional homebuyers. The one exception may be the HOA contingency. If you're buying a home to use as a short-term rental, then including this contingency may be smart, as many HOAs have rules against renting out properties on a short-term basis. (Cities and counties do, too, so make sure to look into local laws and regulations as well.)
The bottom line
Contingencies are there to protect you when you buy a home, but they also pose a problem -- especially in a bidding war. They might make your bid less attractive, or they could even lose you a property altogether, especially in a seller's market.
While waiving a contingency clause could certainly help in this case, it's important not to do so lightly. Talk to your real estate agent, lawyer, loan officer, and contractors about how you'd handle the consequences if something went awry. If you have a solid plan for how you'd handle the problem, then waiving the contingency could be a good move.
If you're unsure about your finances or you're not confident in your abilities to bounce back if something didn't go as planned, then you may want to keep those contingencies just to be safe. In the end, a lost property is better than one that puts you in the red.
Aly Yale, Contributor TMFAlyJYale | aly.yale@foolcontractors.com
Aly J. Yale is a freelance writer and journalist from Houston. She currently covers real estate, mortgage, and finance topics for publications like Forbes, Bankrate, The Balance, and The Simple Dollar and previously spent time at The Dallas Morning News, NBC, and PBS.
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