Should You Make a Clean, No-Contingency Offer?

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.