If you’ve watched by YouTube videos or read my blog, you’ve probably seen a lot of information about contingencies that are put in place by the buyer during a real estate transaction. As recently as 2019, the state of California’s standard purchase agreement had several built-in contingencies that were designed to protect buyers. These contingencies can cover a variety of topics which we will discuss in greater detail in a moment.
However, in the last couple years, we’ve seen a significant increase in the number of non-contingent offers. Not only are sellers who find the home they believe they want to live in writing offers without any contingencies in place, but in many cases, sellers are listing their property with the caveat that they will only accept these non-contingent offers.
In the past, non-contingent offers were most common in areas like Silicon Valley. This area, which is filled with people with a high net worth and homes that are absolutely pristine set the stage for what has been happening all around the state of California.
Should you list your home as a non-contingent listing? Perhaps even more importantly, should you put in an offer on a home without any contingencies in your offer?
Types of Contingencies
There are loads of contingencies that buyers can put in their offer for a home. We certainly don’t have the time or the space to discuss every type of contingency here, but we can look at some of the most common.
Inspection contingencies are among the most common for potential homebuyers. Essentially, during a home inspection, a state licensed home inspector, a general contractor, or another industry professional will look at every aspect of the home from the foundation to the roof. If the findings of the inspection reveals that there are multiple cracks in the foundation or that the roof is in a state of disrepair, the buyer can decide to either walk away from the deal or negotiate some sellers’ concessions into the final purchase of the property.
Appraisal contingencies are another common tool used by homebuyers. When a seller lists the property, he or she has the final say on how much they’re going to list for. When a seller makes an offer, they routinely put a contingency in place that says that they will only purchase the home if it appraises for the value of the loan that they are applying for.
Speaking of loans, another common contingency is a loan contingency. When a buyer starts the shopping process, he or she probably doesn’t already have a mortgage. In fact, they can’t. The lender will decide whether or not to loan the money used to purchase the home based on a number of factors, usually including an appraisal. This contingency allows the buyer to say that they are only going to purchase the home if they can receive the financing from a lender.
There are plenty of other contingencies that cover everything from termites to mold. Understanding all of your contingency options can allow you to determine if you really want to proceed with a non-contingency offer to purchase a property.
Seller Considerations for Accepting a Non-Contingent Offer
As a seller, you may think that only taking non-contingent offers on a home is the best course of action that you can take. After all, you’re probably looking for a quick sell at a competitive price and a fast closing. On the surface, it seems as though a non-contingent offer makes all those goals a reality.
However, it’s important to understand that a non-contingency offer still greatly helps the buyer. In fact, there is nothing really holding the buyer to the deal. These offers also open up the seller to the risk of future problems. While a court may throw the case out, a seller still may come after you for latent defects that you didn’t disclose to them.
Don’t fall into the trap of assuming that a non-contingent offer sets you on the path of freedom. If there are major issues with the property, there is still an option for the seller to try to come after you, costing you peace of mind, money, and time.
Considerations for Buyers making Non-Contingent Offers in the Bay Area
Obviously, there is more at risk for buyers who decide to write a non-contingent offer. You are running the risk of purchasing a home that may have significant issues that you chose not to learn anything about. Obviously, there are some cases where it may be OK. If you have enough wealth that you’re making an all-cash offer on a home, you’re savvy in the real estate industry, or you’re purchasing a new construction, you may be fine by going with a non-contingent offer. After all, an inspection is unlikely to turn up anything in a newly constructed property.
You can also opt to waive your appraisal contingency in some cases. If you have a big down payment on hand, most lenders are willing to work with you, regardless of the appraised value of the home that you’re planning to purchase.
Finally, your personal net worth will have a lot to do with whether or not you want to waive the loan contingency. Obviously, an all-cash offer doesn’t need this protection. Also, if you’re working with a gold-star lender who has told you that you’re good to go, you may not need to put this in place.
But does that mean you should waive all contingencies? Absolutely not.
A Non-Contingent Offer Anecdote
To better understand the risk of non-contingent offers, let’s look at a recent client who I was able to work with. I was representing the buyer, and a seller came in to make a non-contingent offer on the property. The seller had some home records that were around four years’ old, and the buyer decided that was enough information.
For some reason, the buyer decided, during the transaction to ask for a home inspection. My client was not obligated to allow this. The offer was non-contingent, and the results of the inspection did not have to have any bearing on the deal. The inspector reported that he found multiple cracks in the foundation, throwing the deal into jeopardy. After some research, we found out that the home inspector wasn’t very good, and he admitted that there was actually only one crack, and that it had no structural impact on the property.
However, the stress that my seller-client went through was immeasurable. We wound up closing the deal and everyone was happy, but things were more stressful than they needed to be.
Non-contingent offers certainly aren’t going anywhere. However, before you list your property as non-contingent or you make a non-contingent offer on a home, carefully consider the ramifications that you may be setting yourself up for.