Purchasing a home is a balancing act. Buyers have to weigh fears about a changing market against sometimes unrealistic seller expectations. Add to that the tight-rope multiple offer situation; that fine line between the safety net of buyer protections and the free-fall of incentives that prompt sellers to accept an offer. In a perfect world we want buyers to have the benefit of all applicable contingencies. However, in this marketplace it sometimes behooves a buyer to present a clean offer. A “clean offer” is an offer that is well-written and often contingency-free.
Incorporating contingencies into a purchase contract may seem like the best way to protect buyers’ best interests. Not true, if these complexities preclude them from buying a house. Even a contingent offer reaches a point when the contingencies expire. In any market, it is impossible for your agent to keep you safe from all liability. However, a good agent can give you a deeper understanding of the nuances associated with the risk and grant you the clarity to overcome peril.
A financing contingency is an example of a manageable risk. A loan contingency buffers the risks inherent to the loan application process. Why would buyers write an offer without a loan contingency? The best answer is because; they fully understand the risk, they feel empowered to manage that risk, and they can improve the chance their offer will be accepted.
Most buyers are pre-approved with their lender when making an offer. A well-qualified buyer’s pre-approval letter will have three outstanding lender conditions. If the conditions are not met, the buyer will not get the loan. Here’s what’s at stake:
- The lender must approve the contract. (You can limit this risk by using an approved CAR form and having an expert help you draft your offer.)
- The lender will require an ALTA policy of title insurance. This is the title insurance that protects the lenders interest in the property against any liens or encumbrances unknown to the lender. (This one is easy, the approved form contains language which incorporates CLTA and ALTA policy into the agreement.)
- The lender will need to approve of the properties value in respect to the loan amount through a bank ordered appraisal. This is the doosie. If the house doesn’t appraise, you don’t get the loan. (Believe it or not, this last risk is also manageable. In fact, the lender is not even concerned wether the house appraises at your contracted purchase price. Lenders do not care if you are not getting your money’s worth. They only care that property’s value (their collateral) is strong enough to justify the loan amount. To the primary lender this works out to roughly the loan amount plus 20%.)
We have not seen many issues with appraisals, but this could change as the market fluxes. At any rate, it is safe to assume that every house will appraise at some value. Based on your pre-approval, your liability -should the home not fully appraise- is not the entire contract price, but rather the difference between the price you promised the seller and the appraised value the lender accepts. A buyer can manage this risk and successfully avoid breaching the contract with the seller.
- First, research comparable sales with your Realtor. We do care that you get your money’s worth. Your agent can and should help you become a savvy consumer well before your contract is accepted. Then, if the appraisal falls short, your agent can advocate on your behalf by providing the appraiser with the comparable sales.
- Next, check the strength of your own pocketbook. Do you have any resources to bridge the gap between the appraised value and the contract amount? If the house does not appraise, a home buyer can provide the additional funds necessary and complete the transaction. Similarly, if you have a large down-payment (greater than 20%) you can more confidently waive your financing contingency, because the lender is more likely to find the desired collateral.
- Last of all, your mortgage broker can be a great resource. They can sometimes save the day by finding a secondary lender who is willing to loan you the additional funds required.
Each buyer is unique. Each house represents new circumstances.