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The Pros and Cons of Waiving Contingencies

In the current real estate market, aspiring homebuyers are looking for any advantage. Homes are selling fast; thanks to a limited inventory, pent up demand, and soaring home prices, buyers are trying a variety of strategies to increase their chances of having an offer accepted.

The most obvious solution is to simply offer more money. Going 5% or even 10% above asking price on an initial offer is a clear way to grab a sellers’ attention. Other strategies include getting early pre-approval, purchasing sight-unseen, or even writing a buyer’s letter.

Another strategy is to waive the contingencies. With this approach, you can significantly reduce closing times, remove many of the negotiation points, and create a smoother sale for the current homeowner.

It’s not without it’s risks, but waiving contingencies, especially in a red-hot market, could be the key to success with your next purchase.

What are Contingencies?

“Contingencies” are simply part of a purchase offer that states the offer will go through once a certain condition is met. The offer may be “contingent” on a thorough home inspection with no significant issues. In this case, if an inspection finds serious issues with, for example, the foundation, the purchase offer is voided.

Contingencies can include physical and structural aspect of the home, or they can include requested actions that the seller needs to complete. The offer may be contingent on the seller updating the electricity or fixing a damaged sidewalk. (In these cases, the updates may be required by law before selling.)

Contingencies may encompass the buyer. Financing approval is the most common contingency. With this clause, the buyer says they will make the purchase as long as financing is approved; it it’s not, they get to walk away from the purchase free and clear.

Read this article for a deeper explanation on contingencies.

Contingencies reduce risk to the buyer, but having them as part of your offer also delays the purchase and makes your offer less attractive to sellers. For this reason, many people consider waiving contingencies from their purchase offer.

Pros of Waiving Contingencies

In a seller’s market like San Diego, or many of the cities across California and much of the U.S., waiving contingencies can make your offer more attractive.

Here are some of the benefits for waiving contingencies on your next purchase…

Reduces Closing Time

Sellers are often motivated by two things: how much money they can get for their home, and how fast they can sell the property. Selling a property quickly eliminates a major hassle in their lives, and some buyers may even accept smaller offers as long as the property is taken off their hands quickly.

Waiving contingencies creates a faster path to closing the deal. Depending on which contingencies you waive, you may be able to reduce the time to close by a week, two weeks or even a month. (Reducing by a month, we should note, is fairly rare.) If a seller is moving to a new area and doesn’t want the hassle of trying to sell a home hundreds of miles away, waiving contingencies and creating a faster close can be extremely useful.

Increases Chances of Offer Going Through

Contingencies are a big “if” on the purchase offer. You will make the purchase if repairs are made, and if you get financing, and if your home is sold and…the list goes on. Waiving contingencies eliminates or reduces these “ifs,” giving sellers greater reassurance that the purchase will go through.

Reduces Cost, Hassle to Seller

Some contingencies include expenses or even hassles to the seller. Many purchase offers are contingent on the home being repaired and updated, which means the seller essentially has to work with contractors, schedule services, and spend money; all to sell a home they will no longer live in. Many sellers simply want to be free and clear of the house with little to no hassle and costs; an offer that has no contingencies can help match this goal.

May Reduce Costs to Buyer As Well

A home purchase can be expensive enough as it is. Inspections and repairs only add to the cost. If you want to reduce your expenses, at least for the upfront cost of purchasing a home, waiving contingencies may help. Inspections, most notably, cost hundreds of dollars; combined they can reach into the thousands. So if you are struggling to make a purchase while maintaining your current budget, waiving contingencies could help reduce initial costs.

All of these advantages, however, need to be measured against the real-world disadvantages of waiving contingencies.

Cons of Waiving Contingencies

Waiving contingencies helps you win a home, but it could mean expensive repairs in the future.

Risk of Significant Repairs in Future

Waiving an inspection contingency can reduce the initial cost of making a purchase. However, you may pay for the luxury later as issues with the house or property are discovered. Home inspections, essentially, help you understand what you are buying, but waiving contingencies means you really don’t know what you’re getting. You might purchase a home with no issues, or you may purchase a home with significant problems. It’s like a financial gamble, and there is a significant chance you may lose.

Greater Chance of Losing Your Earnest Money

When you make an offer, you’ll put up earnest money that shows your commitment to buy. With contingencies, you get your earnest money returned if your have to back away from the deal. But without contingencies, your earnest money is not returned. Suppose you put up $5,000 in earnest money but do not have a financing contingency. In this case, if the financing is rejected for any reason, you do not get the money returned; it stays with the seller.

There are risks to waiving contingencies, and these risks need to be seriously considered when you are purchasing a home in a seller’s market.

Superior Service for Your Next Home Purchase

If you need a top-quality loan for you next home purchase, contact the staff at San Diego Purchase Loans today! We take a common-sense approach to mortgage underwriting, and we’ll use all our knowledge, skills, and resources to increase your chances of approval!