Buying a Home Is Stressful Enough Without Contingencies
When you’re ready to purchase a new home, you often don’t think about all of the negotiations, red tape, and competition you might be facing. Will you offer full asking price? Can you remove contingencies from your offer? Will your existing home be sold in time? It would be great to make an offer and know you will be able to move soon. Unfortunately, real estate isn’t bought and sold that way. It takes time. It also causes home buyers and sellers alike plenty of stress.
One of the more nerve-racking elements of buying a home is the contingencies. Investopedia defines contingency this way: “A contingency clause defines a condition or action that must be met for a real estate contract to become binding.” In the most basic terms, your deal is dependent on several things happening. Those things are largely unpredictable and, therefore, stressful for both you and the seller. Many of the contingencies are included to protect you, the buyer, but they also give the seller a lot of uncertainty and can make your offer less competitive.
There are a few types of contingencies, each of which can cause the real estate transaction to sour if they aren’t met. You can remove some contingencies (we’ll go through how to do that later), but let’s make sure you understand the most common contingencies out there.
Financing and Home Sale
There is an inherent problem with traditional home sale transactions. Unless you have a boatload of cash at hand, it typically requires the home buyer to sell their existing home first in order to have the funds to purchase the new home. Most banks won’t approve you for a new mortgage until your existing one is paid in full. These reasons are why approximately 44 percent of closed home sales include a financing contingency.
It can be challenging enough to find enough cash for a down payment. With the average home price in the United States around $231,700, and 2-3x that in more expensive urban areas, it’s no wonder few people can pay cash for a home. If you don’t have all of the cash to pay for the new home, how do you time the market so you sell and close on your home at precisely the right time? What if you sell too soon, before you’ve found another home? What if you sell too late and someone gets the home you had your heart set on because they made a more competitive, non-contingent offer on it? Financing a home with a mortgage can cause you to wait 30-60 days more to get the loan closed and approved.
Finding the cash to buy a new home is only part of the problem. There all kinds of issues that might cause you to want to back out of a sale, and that’s why there are matching contingencies for each of these major items. The new home needs to be inspected by an independent inspector. You don’t want to buy a new home, only to discover a few months later that you have a leaky roof or a cracking foundation. Nearly 60 percent of offers have a home inspection contingency.
Home inspectors are there to help you and the seller understand the condition of the home. It’s up to you and the seller to determine which issues need to be fixed and how they will be handled. While you may be willing to discount some noted problems, such as bent gutters and chipped floor tile, there may be deal-breaking issues that force you to rescind your offer. These often require negotiations on how those repairs will be paid for. For example, the seller might agree to let you take the repair costs out of the home price. No matter what you negotiate, you’ll need an inspection, plus contractor bids for repairs to understand what those repairs will cost.
Your lender will also want to do an appraisal if you are seeking to finance the home with a mortgage. They want to make sure the asking price is reasonable compared with what they assess the value of the home to be. Remember, you’re using their money to purchase the home and they don’t want to pay more than what the home is actually worth.
Your lender will send out a licensed appraiser to the home you’re wanting to buy to survey the property. They’ll then combine his or her evaluation with tax records and comparable homes that have recently sold in your area. From there, the appraiser will provide you and your lender their appraisal report that shows the appraised value. If the sales price is at or below this value, you’re in business. Otherwise, you’ll either need to find more cash to put into the deal to cover the difference, negotiate the price down, or rescind your offer and look elsewhere. The appraisal contingency allows you to try any of these paths. Without it, you’d be forced to move forward with the purchase.
There are a few more contingencies, but these are the most common and the ones you will most likely have to deal with. Here’s the rub: the more contingencies attached to your offer, the less competitive your offer will be. Home sellers don’t have to accept your offer. They may want to wait for a better offer or they may have multiple offers on the table and they’re going to gravitate towards the one that will be the least stressful, close the fastest, and have the lowest risk of falling through. Those contingencies all mean certain things must happen in order for the transaction to happen. The more contingencies you can remove from your offer, the more attractive your offer will be.
How to Remove Contingencies to Sweeten Your Offer
Some contingencies are actually a good idea, such as the inspection contingency. Other contingencies just complicate matters and can detract from your offer. There are ways to remove a few contingencies that will make your offer stand out amongst any others and speed up the sales process to benefit both you and the seller.
First and foremost, the home sale contingency has to go if you want to make your offer more attractive. If you’re trying to win a home in a competitive market, it’s almost a given that you can’t make a home sale contingent offer and succeed. The real estate market is highly unpredictable. Even the most seemingly solid offer can fall through. Your seller knows this. If your offer on their home is dependent upon you selling your existing home, they know that’s a huge risk. It could take months for your home to sell and close, and the deal with your buyer could fall through at any moment. That means your home seller either has to wait it out with you or move on to an offer that isn’t contingent on a home sale.
Before you start thinking most offers will have that same home sale contingency, remember that not all home buyers are in the same boat as you. They may not own a home they need to sell first. They could be renters, relocating, or have enough cash to secure the home without financing. How can you compete with them if you’re offer is tied to you selling your existing home first? You can’t.
Then, there’s the financing contingency. While financing contingencies are quite common, they also introduce risk for the seller that your offer will fall through if you can’t get approved for a loan. All-cash offers instantly remove this contingency. They also remove the lender appraisal contingency. Here’s how.
To get approved for a mortgage, most homebuyers need to have their existing home under contract and scheduled to close at or before their new home purchase date. Why? Because most buyers can’t meet mortgage approval requirements when the lender calculates that they hold two mortgages, even if it’s only going to be for a short time. With an all-cash offer, on the other hand, you never have to deal with a lender at all, nor do you need them to appraise the home you are buying. Cash offers are simpler and significantly faster for you and the home seller, making your offer more attractive than any offer that includes financing, appraisal, and home sale contingencies.
You’re likely wondering how you can get that much cash without dipping into retirement accounts or tied-up investments, something many experts advise against. That’s where we come in.
Homeward is different than a traditional lender. You can apply online in less than 10 minutes. We will assess the value of your existing home and give you credit for the equity in your home. We then give you access to our funds so you can make an all-cash offer on your next home. Then, once Homeward has secured your home, you sell your current home and get a mortgage to buy the new home from Homeward and pay a 1.9% fee in addition to all normal closing costs. Sellers often give discounts for all cash offers or may be willing to cover some or all of the Homeward fee in order to avoid a contingent offer scenario.
Not only does the all-cash offer bolster your offer by removing some contingencies, but it also eliminates the need for you to sell your existing home before you purchase your new home. You can either move into your new home immediately after purchasing it, while you’re selling your old one, or you can stay in your existing home while you make renovations on your new one. Either way, you’re in control of when you move.
You can rent your new home from Homeward for up to six months until your existing home sells. Once it does, you get a traditional mortgage and use the funds to buy your home back from Homeward. If for some reason your existing home doesn’t sell, Homeward will buy it from you at a fair price you’ve both agreed to in advance.
This is the modern way of buying a new home and one that is gaining steam as people are realizing the many benefits of all-cash offers. If you are looking to remove contingencies from your offer so it will be more attractive to home sellers, close faster, and enjoy the freedom to move when you want without worrying about selling first, this option is definitely worth investigating. To learn more, read about How Homeward Works.
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