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. One of the key features of the state of California’s Residential Purchase Agreement is that there are several built-in contingencies that are designed to protect buyers. These contingencies can cover a variety of potential issues 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. Buyers have become outright brazen. The stiff competition in Silicon Valley and the Bay Area have made buyers ruthless when they write offers designed to knock out the competition. What’s more, as Bay Area buyers have increasingly been moving to areas outside the Bay Area’s traditional core (like Santa Cruz, Monterey, Tahoe and the Wine Country, etc.) they are bringing their cutthroat offer tactics along with them.
Types of Contingencies
There are loads of contingencies that buyers can put in their offer for a home. Actually, a buyer can write any contingency they want to into their offer. We certainly don’t have the time or the space to discuss every type of contingency here, and actually, one contingency pretty much covers everything: the inspection contingency.
The Inspection contingency is the most common for potential homebuyers, and the most important in many respects. This is an amazing contingency for a buyer, because it allows them to cancel the contract for any reason, or no reason, and get their deposit back, so long as that contingency is in place. Sellers cannot dispute the buyer’s need to cancel, they can’t argue that the buyer’s concerns hold no merit – if the buyer wants out for any reason, or no reason – the door is wide open to them so long as they have that inspection contingency.
People usually think of an “inspection contingency” as an opportunity to hire inspectors and contractors to look at every aspect of the home from the foundation to the roof and everything in between. And it’s true that the an inspection contingency can be used for this. But it can and should also be used to ensure you can obtain insurance on the property, verify school district boundaries, research upcoming developments in the neighborhood – whatever. An inspection contingency can and should be used for the purposes of the buyer’s due diligence, whatever that means to the buyer.
Appraisal contingencies are another common tool used by homebuyers. When a buyer makes an offer, if a buyer is getting a loan to buy the property (which is true in about 75-80% of transactions), they routinely put an appraisal contingency in place that says that they can cancel the purchase if the property appraises for less than the contract sale price – even $1 less. Actually, the California purchase agreement now allows for an “appraisal gap” so the buyer can specify a lower price than the offer price for the appraisal contingency, although this is not commonly used and since appraisals rarely come in low in the Bay Area.
Speaking of loans, another common contingency is a loan contingency. While a buyer is unlikely to get their offer accepted unless they have demonstrated they have a pre-approval from a lender, the fact is, a lot can go wrong between pre-approval and actual full mortgage loan approval. Their could be appraisal issues, insurance issues, or credit issues may crop up that could end up resulting in loan denial.
There are plenty of other contingencies that a buyer might write in to a contract to cover specific issues they may be concerned with, like a buyer’s need to sell their current home in order to buy the new one, or getting termite or mold clearance.
As a seller, it’s important not to be fooled by any contingency a buyer may write into the contract for specific conditions, for example, that the offer is contingent on the seller making such-and-such a repair. That can get messy, because a buyer can always say that they are unhappy with the way the repair was performed and use that as a reason not to proceed to close. Or, for example, a buyer may write a specific contingency for a survey, that the buyer needs to approve of where a specific property line or corner. What if the buyer claims the identified property line or corner is just 1″ off from what they find acceptable? I’ll tell you what happens: the buyer can just walk away, or uses the threat of cancellation to extract concessions from the seller.
In practice, any contingency that requires any kind of judgement and approval of certain conditions by the buyer is also just a way for a buyer to potentially walk away from the deal scott free.
Everyone wants to know…
Seller Considerations for Accepting a Non-Contingent Offer
As a seller, you may think that taking a non-contingent offer on our home is the best course of action that you can take. After all, you’re probably looking for a quick, “sure fire” sale at a super-high price and a fast, smooth closing. On the surface, it seems as though a non-contingent offer is the best route to take to get you there.
However, it’s important to understand that a non-contingent contract is no guarantee of anything. What non-contingent offers are ultimately about is a buyer’s ability to have their earnest money deposit returned in the event of buyer default (failing to close the sale when they have no contingencies, or no remaining contingencies, on the deal).
When a seller accepts a non-contingent offer, particularly when the offer was made when the seller was in receipt of multiple offers and they’ve had something of a bidding war, they are going into contract with a buyer who is saying that they are 100% all-in on the property. They’re committed, and if they back out, they understand their deposit may be forfeit. These buyers are much more likely to close, statistically, than buyers who have all the standard contingencies in place, especially an inspection contingency.
While a non-contingent offer is much more likely to close without issue than a contingent offer, it’s not something a seller can ever count on 100%. This is especially true when a buyer is obtaining a loan – even if they waive their loan and appraisal contingencies (as is common in the Bay Area and the surrounding regions), the fact is, if there is an issue with the loan, the buyer will, in many cases, need to cancel even though the contract is non-contingent.
In this unfortunate scenario, the buyer will, in most cases, ask that their earnest money deposit be returned regardless. They may point to extenuating circumstances, or come up with some excuse, perhaps try to blame the seller for something. But sellers need to understand that if a buyer cancels a non-contingent contract, the buyer’s deposit does not automatically go to the seller. The buyer can, and usually does, fight the seller for the return of the deposit, and, in most cases, they are actually successful in getting the deposit returned. That’s because sellers are usually more interested in closing the sale of their home than keeping a buyer’s earnest money deposit, and it is difficult to sell a home to another buyer while fighting the previous buyer over the disposition of their deposit.
Time to talk to a REALTOR?
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 are waiving your right to discover or learn more about. Obviously, there are some cases where this may not be particularly risky – for example, if you are familiar with the neighborhood issues and the seller has provided a very complete disclosure package meticulously detailing the condition of the house. Or, if you have enough cash 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 because you’re confident in your ability to have any likely issues dealt with on your own, after closing.
But just because you can make a non-contingent offer, just because you feel you have to make a non-contingent offer because you’re competing against well-armed and reckless buyers who are doing that, does that mean you should make a non-contingent offer?
Most lawyers and experienced real estate brokers would have to tell you no, you shouldn’t do it. In fact, the California Association of REALTORs even has a standard form, the NCOA or the Non-Contingent Offer Advisory and Quick Guide to Non-Contingent Offers, where they advise against making non-contingent offers. Here’s an excerpt from the non-contingent offer advisory:
Broker recommends that you do not write a non-contingent offer, even if you are planning on paying all cash for the property. If you intend to write a non-contingent offer, Broker recommends that, prior to writing the offer, you: (i) review all available Seller reports, disclosures, information and documents; (ii) have an appropriate professional inspect the property (even if it is being sold “as is” in its present condition); and (iii) carefully assess your financial position and risk with your attorney, accountant or financial advisor.
There is inherent risk in writing a non-contingent offer. Only you, after careful consultation and deliberation with a qualified California real estate attorney, accountant, or financial advisor can decide how much risk you are willing to take. IT IS YOUR DECISION ALONE AND CANNOT BE MADE BY YOUR BROKER OR REAL ESTATE AGENT
Get a Dream Offer
A Non-Contingent Offer Anecdote
To better understand the risk of non-contingent offers, let’s look at situation I had to deal with a few years back. I was representing the seller, and a buyer made a non-contingent offer on the property. The seller had some home inspection reports that were around four years’ old, and the buyer decided that was enough information for them to make a non-contingent offer. The buyer was actually a contractor, and they had plans to do a lot of work on the property anyway, after closing.
For some reason, the buyer decided, during the transaction to ask for a home inspection, even though they had no inspection contingency. Since the offer was non-contingent, the results of the inspection should not have had any bearing on the deal. However, the inspector reported that he found multiple cracks in the foundation, throwing the deal into jeopardy. After some follow-up, I found out that the home inspector had done some sloppy copy-and-paste work with the report, and he admitted that there was actually only one minor crack (as disclosed in the old reports the seller provided), and that it had no structural impact on the property.
However, the stress that my seller-client went through was immeasurable. Here he thought he had a solid non-contingent deal which he had been counting on closing, and all of a sudden, that was totally up in the air. We wound up closing the deal and everyone was happy, but because my client had so many expectations around a smooth closing because of the non-contingent nature of the buyer’s offer, there was a decidedly rough few days on the way to the closing table.
Conclusion
I’m going to be honest with you here: when I represent a seller, my goal is always to get buyers to write non-contingent offers on the property. If I were a seller, I’d want one too. That is not always possible, but with the way that I work, I’m frequently able to get it. However, when I represent a buyer, I always want them to have all the contingencies in place, because I feel I really need to protect my clients against any likely (and even not-so-likely) eventuality, and that’s what these contingencies are designed to do.
However, the scarcity of homes in the Bay Area and the savvy and well-funded competition presented by other buyers often mean that my clients have to make some gut-wrenching decisions about writing a non-contingent offer, or have a much greater risk of not being able to buy the home they want most of all. It’s a tough call no matter which way you go, but understanding the bigger picture around making non-contingent offers is the best way to start.
Access Off-Market Inventory
Prime Single Family Homes for Sale in Silicon Valley
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
