Should I Make A Clean, No-Contingency Offer?
Rachel Burris6-Minute Read
June 26, 2020
Scoring the home of your dreams can be a stressful, lengthy process, especially if your area is experiencing a seller’s market. In a seller’s market, the demand for housing exceeds the supply. With fewer homes available, bidding wars become more common, and buyers are often forced to make sacrifices.
In an effort to ensure that nothing gets in the way of their purchase, buyers often try to make their offers as enticing as possible. But, sometimes, buyers need more than money to get the deal done. They need to be flexible.
That’s where clean offers come in. When buyers are serious and determined to close, they may offer to waive all contingencies. Making a clean, no-contingency offer may be a great way to persuade sellers to choose your offer, but there are a number of risks involved.
If there’s a lot of competition for that home you just can’t stop thinking about, making a clean offer could work in your favor. But first, learn what contingencies are, why it’s risky to waive them and how you can use them to your advantage.
What Is A Contingency?
A contingency is a clause included in an offer, which states that specific conditions must be met in order for a deal to close. If the conditions stipulated in the contingency are not met, the buyer is able to break the contract without facing financial repercussions. Therefore, contingencies are a means of providing buyers with protection against the risks involved in purchasing a home.
In real estate transactions, once an offer is accepted, buyers demonstrate their seriousness by sealing it with a deposit of earnest money. This deposit, which is usually around 5% of the sales price, provides the sellers with security that the buyers won’t back out of the deal. Typically, buyers lose their earnest money if they decide not to buy the house after signing the contract. However, with a contingent offer, buyers are allowed to recover their earnest money if the conditions specified in the offer are not satisfied.
Sellers often jump at clean, no-contingency offers because they are guaranteed to benefit from the deal: Either the sellers will be able to sell their house for the agreed-upon price, or they will be able to keep the earnest money the buyers forfeit by walking away from their property.
What Are The Most Common Contingencies?
Since contingent offers are usually a safeguard for buyers, the most common contingencies protect them from the largest risks they face when purchasing property. Here are the most common contingencies that a buyer may include in an offer to allow them to break their contract and walk away from the deal without losing their earnest money:
- Inspection Contingency: Protects a buyer against purchasing a home that is revealed to be in poor condition or requires major repairs.
- Financing Contingency: Covers a buyer if they're ultimately unable to obtain the mortgage they need to afford the house.
- Home Sale Contingency: Used to provide a buyer with time to secure the sale of their current home.
- Appraisal Contingency: Enables a buyer to rescind their offer if the appraised value of the home is lower than the agreed-upon sales price.
- Title Contingency: Prevents a buyer from having to purchase a home if the seller is unable to transfer the title to the buyer free and clear; that is, without any liens or encumbrances on it.
What Happens If I Waive Those Contingencies And Make A Clean Offer?
Some buyers choose to waive contingencies and make clean offers in order to make their bids more competitive. Clean offers are more likely to be chosen by sellers because there’s no risk involved for them. Remember, with clean offers, sellers know that regardless of what happens with the transaction, they’ll be able to walk away with cash in the form of either the purchase price or the buyers’ forfeited earnest money.
On the other hand, clean offers increase the riskiness of the transaction for buyers. When buyers waive contingencies, it means that they’ll still have to purchase the home or surrender their earnest money if any problems arise. Let’s take a look at the specific risks involved in waiving each of the most common contingencies:
- Waiving the inspection contingency: A home inspection is a crucial step when purchasing a house, as it provides buyers with a full understanding of the property’s condition. By waiving the inspection contingency, buyers may end up buying a house that has major defects, like structural damage, without knowing it. As a result, buyers also lose their ability to renegotiate the offer and ask that the sellers either make major repairs or lower the purchase price to reflect any work that needs to be done on the house.
- Waiving the financing contingency: Although it certainly helps, being preapproved for a mortgage doesn’t guarantee that buyers will be able to obtain the funds they need to purchase a house. Waiving a financing (or mortgage) contingency can be risky, as it prevents buyers from being able to back out of the house if their financing falls through. Without this contingency, buyers are still obligated to surrender their earnest money or pay the full purchase price of the home regardless of whether they have the funds necessary.
- Waiving the home sale contingency: Many homeowners need to sell their current house before they can purchase another. If a buyer needs the proceeds of the sale to be able to afford their next home, waiving a home sale contingency can put them in financial jeopardy. If the sale of the buyer’s current home falls through, they would be forced to give up their earnest money.
- Waiving the appraisal contingency: Lenders require that homes be appraised before they agree to give buyers mortgages, as they want to ensure that they don’t lend more than the home is actually worth. By waiving an appraisal contingency, buyers may be forced to pay the difference between the sales price and the appraised value of the home out of pocket or lose their earnest money.
- Waiving the title contingency: Performing a title search on a home reveals the legal owners, as well as any liens on the property. If a buyer waives a title contingency and the title search reveals that it’s unclean, the buyer will unintentionally assume the responsibility for all of the seller’s debts by purchasing the home. Furthermore, the buyer may also expose themselves to lawsuits regarding the ownership of the property.
How Can I Use Contingencies To My Advantage?
While waiving contingencies may help you secure a home in the midst of a bidding war, contingencies exist to aid buyers in negotiating the terms of real estate transactions. Purchasing any property involves a certain amount of risk, but contingencies mitigate your exposure to them. You can use contingencies to your advantage by analyzing the house and your financial circumstances before you sign on the dotted line.
For example, if you’re interested in purchasing a historical home, you’d want to include an inspection contingency in your offer. The reason including this contingency would be in your best interest is that older homes tend to be in worse shape, and the contingency would ensure that you weren’t purchasing a money pit.
If, on the other hand, you didn’t have the cash necessary to purchase the house, it would be beneficial to include either a financing or home sale contingency to ensure that you’re able to access the funds you need to go through with the sale.
Enlisting the services of a good real estate agent can help you determine the types of contingencies you should consider to ensure that you’re making a wise purchase. An agent can also help you identify the seller’s pain points and guide you toward waiving the specific contingencies that will help sweeten the deal beyond the sales price.
Summary: Contingencies Protect Against Big Risks
While contingencies are intended to protect buyers against financial loss, there are some circumstances where buyers may feel that making a clean, no-contingency offer is in their best interest. Clean offers are more common when purchasing a home in an area that’s experiencing a seller’s market because bidding wars are more likely to occur, and contingencies often make sellers wary.
However, if you want to make an offer without contingencies, you should be careful. The last thing you want is to lose your earnest money deposit because avoidable issues forced you to back out of your contract. If you’re thinking about making a clean offer, it’s best to consult a real estate agent.
To learn more about the ins and outs of purchasing a house, explore our other home buying tips.
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