Contingent Offers: What Home Buyers Should Know

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Contingent Offers: What Home Buyers Should Know

As a home buyer, making a contingent offer is a smart move. With this type of bid, your purchase hinges on having certain conditions met. If they aren’t fulfilled, you can cancel a sales contract without legal repercussions. Below are the most common contingencies added to home purchase agreements. If you’re looking at penthouses, condos, or lofts in downtown San Diego, consider these options as you get ready to purchase your new home.

Mortgage

With this contractual statement or “clause,” you have a certain number of days to obtain financing. If you can’t secure a mortgage by the deadline, you can void the contract and reclaim your down payment. If you want to extend the expiration date, you must have the seller’s written consent. Otherwise, you’re obligated to buy the home, whether or not you have a mortgage in place.

Since loan hunting can take months, make sure your contingency period is adequate. To streamline financing, try to get a preapproval. A lender grants this privilege after reviewing your debts, assets, income, and credit history. Although preapproval isn’t a loan guarantee, it shows you’re a worthy financial risk for both a lender and a home seller.

The lender’s investigation will reveal how much money you can safely borrow and pay per month, along with the loan interest rate. Typically, a preapproved status is valid for 60 or 90 days and is stated in a letter you can show to sellers. Final loan authorization occurs after a home is appraised.

Without a mortgage contingency clause, your deposit can be lost to a delay in loan processing. The ideal financial protection is pairing mortgage preapproval with a contingency. Once you make an offer, your loan will be finalized more quickly, since the lender already has most of your financial data.

Appraisal

When you submit a mortgage application, the lender will order a home appraisal, which is an estimation of current market value. An appraisal can be based on the home’s location and condition as well as recent sales of similar properties in the area.

With an appraisal contingency, you’re free to break the deal if the selling price is well above the home’s worth. Otherwise, you’d be overpaying. The reason is that a bank won’t finance more than the appraised price. You’ll have to supply the balance due as a higher down payment.

Here’s a good example. Let’s say a house is priced at $500,000 and appraised at $475,000. You’ve been granted a fixed-rate loan for 90 percent of the cost, with a 10 percent down payment. Since the home’s market value is lower than the asking price by $25,000, your deposit will be $72,500.

Banks conduct appraisals to hedge against foreclosures. They want to ensure buyers aren’t overborrowing and can pay back their loans. One way to lower bank risk is to negotiate a compromise with the seller. In the above scenario, you could ask the sellers to reduce the asking price. If they won’t and you have a contingency clause, you can cancel the contract and keep your down payment.

However, there’s a catch. A contingency has an expiration date. Once you receive an appraiser’s report, you must discuss any issues with the seller before the contingency release date. If you fail to do this, you must buy the house.

Home Inspection

This type of clause has two mandates. One is having a house inspected by a certain date. Secondly, if an inspector finds structural problems with the house, you can negotiate repairs with the seller.

Generally, a home inspection covers the exterior and interior of a house, including its roof, attic, basement, foundation, ceilings, doors, windows, floors, and visible insulation. Also examined are the home’s systems for heating, plumbing, electricity, and central air conditioning (if present).

The inspector’s report will describe the home’s condition, what needs repair, and what steps would be involved in making the repairs. In your inspection contingency, you can ask the seller to make the renovations or cover their cost by lowering the home price. If the seller refuses and the repairs are too burdensome for you, there’s no obligation to buy.

Common structural problems are a cracked foundation, water damage, mold, and evidence of termite infestation. Another way to avoid pricey restoration is by adding a cost-of-repair contingency to your home inspection clause. With this proviso, you limit repair costs to a specific dollar amount. If the inspection reveals a need to pay more, you can cancel the purchase agreement.

Home Sale

Since this option can work against you, give it due consideration. With a home sale contingency, you’re requesting time to sell your existing home before closing on the new one. If you don’t receive a promising bid by the contingency deadline, you can terminate the contract with your deposit intact. Alternatively, if your current home doesn’t sell at a price high enough to afford the new house, the contingency clause gives you an out.

A variation of the home sale clause is the settlement contingency. It states that your current house is under contract but you want to close on it before buying your dream home. During such waiting periods, a seller can review other bids. Meanwhile, the seller’s realtor must advise interested buyers that a contingent offer has been accepted. Home sale and settlement contingencies keep sellers from moving forward. For this reason, these contingencies are losing popularity.

However, sellers can protect their interests by adding a “kick-out clause” to the purchase agreement. With this arrangement, if the seller receives a higher bid while yours is stalled, you have 72 hours to remove the house sale contingency and keep the contract valid. If you don’t, the seller can cancel it and accept the better offer.

Title

In the real estate industry, a title shows the past and present owners of the property. The title also documents any property liens, judgments, and lawsuits involving the property. To ensure a buyer receives a clear title, a lawyer or title company must validate the record.

This process entails verifying the ownership history and investigating factors that could impact a new owner, such as recorded easements. Sometimes issues are quickly resolved. However, in certain instances, clearing a title cannot be achieved before closing. In that event, a title contingency allows you to leave the sale rather than waiting until legalities are settled.

Notice to Perform

In California, buyers and sellers can expedite closing by issuing a Notice to Perform. Similar to a kick-out clause, it gives the other party 72 hours to complete a task stated in the purchase contract.

A buyer’s Notice to Perform could include actions such as making a deposit, submitting a mortgage preapproval letter, finalizing a mortgage, returning signed disclosures and reports, or giving proof of funds to close the sale.

On the other hand, you can serve a Notice to Perform to a seller. For example, you could demand proof of repairs, an exterminator’s report, or homeowners association papers.

If the person receiving the notice doesn’t comply, the purchase agreement ends. Another term for a Notice to Perform is the 72-hour clause. However, the exact time can vary, depending on what your contract stipulates. When including this clause, make sure to state whether weekends and holidays are counted in the specified time period.

Note that to remove a contingency, you must do so in writing. If not, the sellers can serve you with a Notice to Perform. Alternatively, they can cancel the sales contract.

Contingency Documentation

To make a contingency offer, you must give the sellers a letter conveying your bidding price, contingencies, and expected closing date. Once the sellers read your statement, they can extend a counteroffer, accept your bid, or decline it. The sellers indicate their acceptance by signing your contingency letter.

Here’s another possible scenario. You bid on a property for which the seller has already accepted a contingent offer. In that case, your agent will disclose the other buyer’s conditions. If you still want the home, you can make a “backup offer.” Then, if the contract with the first buyer falls through, the seller may consider your backup offer.

Breach of Contract

Your purchase agreement is legally enforceable if all contingencies are met. At that point, backing out is a breach of contract. A seller’s recourse can be keeping your earnest money or filing a lawsuit. For instance, a buyer can be sued if the seller receives no further bids.

The ability to make a contingent offer can be useful in a number of situations, but it’s not always the smartest strategy. If you’re looking to buy a new home, make sure to work with real estate professionals with experience and in-depth knowledge about every aspect of buying and selling homes. For the premier source of information and expertise about downtown San Diego real estate,reach out to the experts at 92101 Urban Living. We’ll help you through every step of the home-buying process so you’re able to get into your dream home with as little hassle as possible. Give us a call today at 619-649-0368.

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