Sales Comparison Approach: A Guide for Home Sellers
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Buying a home can be a stressful, lengthy process, especially if your area is experiencing a seller’s market where there are more buyers looking to purchase than there are homes for sale.
If there’s a lot of competition for that home you just can’t stop thinking about, making a clean, non-contingent offer on a home could work in your favor. But first, learn what contingencies are, why it’s risky to waive them and how you can use them to your advantage.
What is a contingency?
A contingency is a clause included in an offer, which states that specific conditions must be met for a deal to close. If the conditions stipulated in the contingency clause are not met, the buyer can break the contract without facing financial repercussions. Therefore, contingencies are a means of providing buyers with protection against the risks involved in purchasing a home.
Contingent offers protect your earnest money deposit
In real estate transactions, once an offer is accepted, buyers demonstrate their seriousness by sealing it with a deposit of earnest money. This deposit, which is usually around 1% – 3% of the sales price, provides the sellers with security that the buyers won’t back out of the deal. Typically, buyers lose their earnest money if they decide not to buy the house after signing the contract. However, with a contingent offer, buyers are allowed to recover their earnest money if the conditions specified in the offer are not satisfied.
The most common contingencies buyers offer
Since contingent offers are usually a safeguard for buyers, the most common contingencies protect them from the largest risks they face when purchasing property.
Here are the most common contingency clauses that a buyer may include in an offer to allow them to break their contract and walk away from the deal without losing their earnest money:
- Inspection contingency: This protects a buyer against purchasing a home that is revealed to be in poor condition or requires major repairs.
- Financing contingency: If a buyer is ultimately unable to obtain the mortgage they need to afford the house, a financing contingency covers them.
- Home sale contingency: This is used to provide a buyer with time to secure the sale of their current home.
- Appraisal contingency: This will enable a buyer to rescind their offer if the appraised value of the home is lower than the agreed-upon sales price.
- Title contingency: If the seller is unable to transfer the title to the buyer free and clear, without any liens or encumbrances, a title contingency prevents and protects the buyer from having to purchase the home.
What does ‘no contingency’ mean?
In a seller’s market, the demand for housing exceeds the supply. With fewer homes available, bidding wars become more common, and buyers are often forced to make sacrifices.
In an effort to ensure that nothing gets in the way of their purchase, buyers often try to make their offers as enticing as possible. Sometimes, buyers need more than money to get the deal done. They need to be flexible.
That’s where no-contingency offers come in. When buyers are serious and determined to close, they may offer to waive all contingencies. This option can be extremely helpful in certain situations, like when a seller makes a highest and best offer request. Making a clean, no-contingency offer may be a great way to persuade sellers to choose your offer, but there are a number of risks involved.
What happens if you make a no-contingency offer?
Clean offers are more likely to be chosen by sellers because there’s no risk involved for them. Sellers know that regardless of what happens with the transaction, they’ll be able to walk away with cash in the form of either the purchase price or the buyers’ forfeited earnest money. On the other hand, clean offers increase the riskiness of the transaction for buyers.
Let’s take a look at the specific risks involved in waiving each of the most common contingencies:
Waiving the inspection contingency
A home inspection is a crucial step when purchasing a house, as it provides buyers with a full understanding of the property’s condition. By waiving the inspection contingency, buyers may end up buying a house that has major defects, like structural damage, without knowing it. As a result, buyers also lose their ability to renegotiate the offer and ask that the sellers either make major repairs or lower the purchase price to reflect any work that needs to be done on the house.
Waiving the financing contingency
Although it certainly helps, being preapproved for a mortgage doesn’t guarantee that buyers will be able to obtain the funds they need to purchase a house. Waiving a financing (or mortgage) contingency can be risky, as it prevents buyers from being able to back out of the house if their financing falls through. Without this contingency, buyers are still obligated to surrender their earnest money or pay the full purchase price of the home regardless of whether they have the funds necessary.
Waiving the home sale contingency
Many homeowners need to sell their current house before they can purchase another. If a buyer needs the proceeds of the sale to be able to afford their next home, waiving a home sale contingency can put them in financial jeopardy. If the sale of the buyer’s current home falls through, they would be forced to give up their earnest money.
Waiving the appraisal contingency
Some lenders require that homes be appraised before they agree to give buyers mortgages, as they want to ensure that they don’t lend more than the home is actually worth. If you buy a house with no appraisal contingency, you may be forced to pay the difference between the sales price and the appraised value of the home out of pocket or lose your earnest money. You can waive an appraisal contingency using an appraisal waiver.
Waiving the title contingency
Performing a title search on a home reveals the legal owners, as well as any liens on the property. If a buyer waives a title contingency and the title search reveals that it’s unclean, the buyer will unintentionally assume the responsibility for all of the seller’s debts by purchasing the home. Furthermore, the buyer may also expose themselves to lawsuits regarding the ownership of the property.
How to use contingencies to your advantage
While waiving contingencies may help you secure a home in the midst of a bidding war, contingencies exist to aid buyers in negotiating the terms of real estate transactions. Purchasing any property involves a certain amount of risk, but contingencies mitigate your exposure to them. You can use contingencies to your advantage by analyzing the house and your financial circumstances before you sign on the dotted line.
For example, if you’re interested in purchasing a historical home, you’d want to include an inspection contingency in your offer. Including this contingency would be in your best interest because older homes tend to be in worse shape, and the contingency would ensure that you aren’t purchasing a money pit.
If you don’t have the cash necessary to purchase the house, it would be beneficial to include either a financing or home sale contingency to ensure that you’re able to access the funds you need to go through with the sale.
Enlisting the services of a good real estate agent can help you determine the types of contingencies you should consider to ensure that you’re making a wise purchase. An agent can also help you identify the seller’s pain points and guide you toward waiving the specific contingencies that will help sweeten the deal beyond the sales price.
FAQs about non-contingent offers
Here are a few of the most frequently asked questions about non-contingent offers so you can better understand your options when you find the house you love.
What is a no-contingency offer?
A no-contingency offer happens when a buyer agrees to waive all contingencies designed to protect their interests in a property transaction. Though it can encourage sellers to accept their offer, it puts buyers at risk of losing their earnest money deposit or buying a home with undisclosed repairs they may not be able to afford.
When should I consider making a no-contingency offer?
If you’re trying to make your offer stand out in a seller’s market, a no-contingency offer may be a good idea. Make sure you’re comfortable with the potential issues that could pop up and that you can afford to forfeit your earnest money deposit before you make the offer.
When is a contingent offer best?
In most cases, making a contingent offer is the better option. Contingencies protect your financial interests in a real estate transaction, and waiving them puts you at risk of losing your earnest money deposit or getting locked into buying a home that needs extensive repairs.
What contingencies should I waive?
If you’re thinking about making a non-contingent offer, consult your real estate agent before you commit. Since every situation and market is unique, they’ll be able to guide you through the types of contingencies you should waive and which ones you should consider keeping on the table.
The bottom line: Contingencies protect against big risks
While contingencies are intended to protect buyers against financial loss, there are some circumstances where buyers may feel that making a clean, no-contingency offer is in their best interest. Clean offers are more common when purchasing a home in an area that’s experiencing a seller’s market because bidding wars are more likely to occur, and contingencies often make sellers wary.
However, if you want to make an offer without contingencies, you should be careful. The last thing you want is to lose your earnest money deposit because avoidable issues forced you to back out of your contract. If you’re thinking about making a clean offer, it’s best to consult a real estate agent.
The best way to set your offer apart is to make sure you’re able to get a great mortgage before you make an offer. Start the approval process today with Redfin.
The post Should You Make a Clean, No-Contingency Offer? appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.
