Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
When planning to purchase an apartment or home in NYC, you will hear about contingencies from your broker and your real estate attorney. A contingent offer on the house is an offer where the buyer discloses in advance potential contract contingencies. Both buyers and sellers in real estate are familiar with contingent offers. How often do contingent offers on a house fall through? Although typical, with contingent offers come risks for both parties. In the following article, we discuss everything you’ll need to know about contingent offers on houses, including:
A non-contingent offer on a house is an offer on a unit made without any deal contingency. An example is an all-cash offer. It can also be an offer with financing that doesn’t have any other form of contingency. An offer with financing that is non-contingent is not less risky for the buyer because they will have to buy the property regardless of financing. The financing aspect is just an excellent option to have if the buyer has the cash anyway.
In a non-contingent deal, there are no protections for the buyer “in contract” if he cannot secure financing. Buyers who place a non-contingent offer with financing know they can secure the money to buy all-cash if they cannot get financing. Those buyers have enough liquidity available to buy the property all-cash. However, they but prefer to benefit from a low-interest rate mortgage. Another scenario is when buyers have a wealthy family and can borrow the cash to close quickly if needed if the financing does not materialize.
A buyer will put in a contingent offer on a house when they require some condition, or conditions, to meet before closing on the sale. The buyer is saying, I want to purchase this home, but I have some concerns to address. These concerns are typically predictable and fall into one of four categories. You must become familiar with the different types of contingencies and how they can impact the deal.
The buyer will put in an offer on a home contingent on an appraisal when they want to make sure the home is worth as much as they agreed to pay. A professional home appraisal will determine the home’s fair market value. Then, the buyer will compare this number to the contract purchase price. Therefore, a successful appraisal will evaluate whether the purchase price is fair. If the home appraisal determines the home’s fair market value is much less than the asking price, the buyer may back out of the deal or renegotiate.
Home inspection contingencies are common. The buyer must inspect the home and go into the closing knowing the exact condition of what they agree to buy. Typically, a buyer will hire a home inspector to alert him of any existing or potential structural or aesthetic damages. If the inspector flags any significant issues, the buyer can negotiate the asking price or back out of the deal completely. This depends on the severity of the problems.
Another protection for the buyer is the mortgage contingency. This is when the deal hinges on whether or not the buyer can secure financing from a lending institution. This may come up when a buyer finds the perfect home and wants to put in an offer before finding a lender willing to give them a mortgage. If the buyer cannot find a lender after putting down this contingent offer, they are legally allowed to walk away from the deal. They can take their 10% deposit with them on the way out. An offer with a mortgage contingency is a significant risk for a seller. Sellers need assurance that prospective buyers are coming to the deal with the necessary funds. Also, they should look for buyers who have already been pre-approved for a mortgage.
A sale or Hubbard contingency allows a time for a buyer to sell his existing home before being forced to walk away or waive their right to walk away from their new purchase. A home buyer who needs to sell his old home first won’t have to face the uncertainty of whether he’ll use the old house’s proceeds in time to buy the new property.
Buyers sometimes need the money from their current home sale to buy the new one. If they are in contract on their new home, the pressure increases, but they cannot find a buyer on their current one. They risk losing their 10% deposit if they cannot come up with the money to complete the purchase.
These sale contingency offers are significantly less attractive to sellers than a comparable non-contingent offer. This is not something they can control. Sellers have no information on how likely the buyer’s existing unit may sell and the timing.
Buyers need to have a clear idea of their specific goals and timelines. The types of contingent offer discussed above offer buyers certain protections but do have associated risks. Say a buyer comes across a home they love, but the appraisal comes in lower than the asking price. The reality is that the seller may not be willing to negotiate down, and you could lose the sale.
It’s also very risky for a buyer to enter the market without first becoming pre-approved. If you put down an offer and cannot secure financing, you can lose the sale if another pre-approved buyer comes along. This is why it’s always a good idea to get pre-approved before you start shopping around.
The answer is yes but only if you have no other offers. However, if you have multiple offers, you should encourage contingent buyers to improve their terms by either increasing the purchase price and/or removing their contingencies. Another technique is to accept multiple offers and even send out numerous contracts for negotiation in parallel. An accepted bid is not binding until fully executed contracts. When the attorneys circulate the signature pages, the seller is the last to sign. The seller is not bound to an accepted offer until he counter-signs the contract.
Disclaimer: The material and information contained in this article are for informational purposes only. You should not rely on the material or information for making business, legal, tax, or any other decisions.