Is it Smart to Make a Non-Contingent Offer on a Home Purchase?
When you make an offer on a home, it’s not always just about the price. That’s certainly one of the most important facets but there are other features that can have an impact, such as a non-contingent offer.
Having already applied with a lender and obtaining a preapproval letter is one. As you sit down with your real estate agent and begin to craft an offer you both feel will get the offer accepted; there is one additional feature of an offer that can sweeten the deal. Even get your offer accepted even though your offer is lower than other potential buyers.
This feature is referred to as a “non-contingent” offer and means your offer does not depend on any other event to happen in order to complete the sale. Most often this means you don’t have to sell your current home in order to qualify for the next home.
Many contingent offers rely on the current home selling. If the owners need the proceeds from the sale of the home in order to close on the next, the offer is contingent on the first home being sold. Otherwise, there won’t be enough funds available for a down payment and associated closing costs.
Let’s say a couple sees a home listed at $500,000. They have already provided a lender with an application and supporting documents and have a preapproval letter in hand. The lender has preapproved them for a $400,000 maximum loan amount which means they need at least $100,000 for the down payment plus additional cash for closing costs. In their bank account they have about $50,000 available, short by another $50,000.
Their current home is listed at $400,000 and they owe $150,000 which means they would net approximately $250,000 less selling costs. They make an offer on the $500,000 home and show the listing agreement on the current property along with a copy of their preapproval letter stating the couple is preapproved yet contingent upon their current loan balance of $150,000 being paid off. According to their lender, their debt ratios would be too high trying to carry two mortgages at the same time.
Sales contracts require performance on both the seller and the buyer. In the contract, there are specific events that must happen and if they don’t the buyers could lose their security deposit. Or, the contract might require the sellers repair the deck and if they don’t the deal could fall through and the buyers would get their security deposit returned to them. As it relates to a sales contract with a contingency clause, if the existing home does not sell in the time required to purchase the new property, the contract again would become null and void and the buyer would again receive their earnest money deposit.
There can be other contingencies related to an offer but selling an existing property prior to closing on the next is the most common.
Making a Non-Contingent Offer
Let’s say for a moment that you’ve listed your home for $500,000 and your agent tells you there are two offers that have just arrived. One is for $500,000 with a contingency clause stating the offer is good only if the potential buyer’s other home sells first. The second offer is $495,000 but there is no contingency clause because the buyers do not have to sell any property in order to qualify for the new home.
Which would you think has the better chance of being accepted?
Most would say the offer without any contingencies. When a sales contract is accepted the real estate agent then places your home in a “pending” status which means an offer has been accepted and the buyers are arranging for a home loan. You might still be able to take backup offers but in all practicality your home will essentially be taken off the market.
Another agent won’t spend much time bringing buyers to your home if the agent sees there is already an accepted offer in the works.
If you have a non-contingent offer along with a preapproval letter in your hand you really can’t enhance your offer any further other than paying all cash. A non-contingent offer along with a preapproval letter assures the sellers there are no foreseen roadblocks that would derail the deal other than issues discovered after the contract has been accepted. For example, a property inspection might discover a faulty foundation or there are some current liens on title that must be cleared up before the property can change hands.
Aside from such discoveries, a non-contingent offer is music to an agent and seller’s ears and makes your offer more competitive than others, even though the price you’re offering is lower than others.
You may also be able to structure a non-contingent offer even if you don’t intend to sell your current home but still need the additional funds to close. Very early in the process, before you even apply for a preapproval, you can get a home equity line of credit, or HELOC or a second mortgage and take out the cash you need for your next purchase. Or, you can apply for a short term bridge loan on the existing property. In addition, if you don’t think you’ll qualify with two mortgage payments, you may also be able to provide a lease agreement to the new lender showing the property will be leased and the rental payments will be more than enough to cover the existing principal and interest, property taxes and mortgage insurance. There are a few steps involved in this approach so make sure you speak with your lender well in advance to see if this can be done in your situation.
Why This Matters…
It’s certainly no secret the days of a buyer’s market are in the rear view mirror. Negotiations in San Diego’s current market definitely favor the seller, not the buyer, and a non-contingent offer can often seize the day even when a contingent offer gives the seller more money, much different than just a few years ago when buyers set the negotiating tone. If you’re not in a situation to make a non-contingent offer, we can help with your offer beat a non-contingent deal.
When a listing agent receives a listing from a buyer, if the listing agent isn’t familiar with not just the loan officer but with the mortgage company, that’s going to be a challenge. Even if a buyer banks with one of the biggest banks in the country if the listing agent doesn’t know the individual loan officer it’s automatically an uphill climb in this environment. Here is our strategy.
Our preapproval letters spell out exactly the documents we review. Real estate agents know there is a big difference in the quality of a letter from a lender. Many times the letter states the buyers are prequalified for a loan but the letter doesn’t state what the lender actually reviewed before issuing a letter and agents are wary of such a vague notification.
The preapproval letters we provide upon receiving a completed loan application clearly spell out the property address you’re buying, the amount of funds needed to close the deal has been independently verified, the loan has already been submitted to an automated underwriting system and has received an approval and credit scores have been received and meet lending guidelines.
As well, we immediately contact the listing agent by phone and email providing our contact information as well as who we are, how long we’ve been in business and that we know what we’re doing. That alone quells most listing agent fears yet most lenders don’t come near to that level of immediate communication. In short, the listing agent not only knows we’re a leader in the field but we might also be a preferred lender in the future for that agent. The one major complaint real estate agents have is a lack of communication and loans falling out without any reason given. There is no “1-800” number to call to find the status of a loan application- we’re right here in San Diego.
In a highly competitive seller’s market buyers find they need to sweeten the offer in as many ways as possible in order to convince a seller to accept your offer over others. Your real estate agent will work with you to not only craft the perfect offer but at the same time get the lowest price possible.
Our job is to catapult your offer past any other, assuring the sellers that you’ve been completely vetted and all that needs to happen is a signed sales contract. In this manner, having a contingency clause doesn’t matter. The sellers feel confident the deal will close in addition to accepting a more competitive offer.