Is Waiving Contingencies A Smart Decision?
by Andrew Sundell
The Situation: Explained
Lately I have seen and heard a lot about buyers waiving some of their standard contingencies to strengthen their offer. Primarily, the contingencies I am referring to are Inspections and Appraised Values. This happens more often in a low-inventory market when multiple buyers are offering on the same house.
Furthermore, the same group of buyers can find themselves bidding against each other on multiple houses. This occurs when there are only a few decent listings that match a highly desirable set of criteria that is shared by many.
For example, in Montgomery & Bucks County in Pennsylvania, there is a high concentration of top-tier school districts. Because these school districts are so highly sought after, the listings in these areas sell very quickly. Thus, buyers attempting to move into these districts must act quickly to see new listings on the market, and must also submit strong offers to win the house. As a consequence, some buyers who have lost out on their dream home in a multiple-offer scenario will forego contingencies to ensure they win the next house.
Which Contingencies Are Typically Waived?
When I mentioned “standard contingencies” in the opening paragraph, I was referring to the Inspection and Appraisal contingencies. These are the two most common contingencies waived in a multiple-offer scenario. The primary reason why these two contingencies work best to strengthen an offer is because they guarantee a higher net sales price for the seller. And in most cases, anything that will increase a seller’s net proceeds will be of great value to that seller.
Home Inspection Contingency
Houses are most often sold in Average condition (i.e., not as-is), and because of this it is typical for a buyer to hire an inspector to thoroughly examine the house. This is a vital step that gives the buyer some negotiating power to get a fair deal.
For example, an aesthetically pleasing home may appear to be worth a lot, but upon further investigation, an inspector may uncover costly material defects that greatly detract from the home’s value. At that point, the buyer and seller enter a second round of negotiations to remedy these problems. This negotiation often results in the seller fixing or providing a credit towards fixing the issues.
When you waive your right to an inspection, you essentially agree to accept the house as-is. In turn, you may think you just purchased your dream home when in reality you may have overpaid because the house could have severe underlying defects. As a buyer’s agent, I would NEVER recommend a client to forego inspections because the potential risk is too high.
Appraisal Contingency
If you are taking out a mortgage to finance the purchase of your home, you will most definitely hear about the “appraised value” during the loan process. When a lender evaluates a property for a loan, they want to ensure that the house is worth at least as much as they are lending. This is because if the buyer defaults on the loan payments, the lender can be reasonably assured that they will be able to recoup the loan amount by selling the house. The house acts as collateral for the loan amount and should be at least equal in value.
Lenders are required to use 3rd party appraisal companies to provide a valuation for each property. If the house appraises at full value (i.e. the agreed upon purchase price), the lender will approve the loan. If the appraised value comes in less than the purchase price, the lender will only lend up to the appraised value.
A buyer can waive this appraisal contingency to strengthen their offer. This puts them in a position where they have to pay the full purchase price whether or not the house appraises at full value. If the house appraises at less than full value, the buyer has to make up the difference in cash at the settlement table because the lender will only provide a loan up to the appraised value.
The disparity between the purchase price and the appraised value has the potential to be quite large, which can put the buyer in a precarious financial situation. Thus, I would NOT recommend a client to waive the appraisal contingency because the potential risk is too high.
The Bottom Line...
It is true that waiving these contingencies will strengthen your offer; however, the potential downside risk is far too great to make it a smart decision. As a buyer’s agent, I always recommend having a home inspection performed. I have seen too many deals fall apart due to unforeseen inspection issues on seemingly well maintained properties. As far as waiving the appraisal contingency, it will strengthen your offer but understand you could end up overpaying for the house.
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