Purchasing a home is almost always the largest financial decision a person will make in their lifetime. In the San Jose, San Francisco Bay real estate market, we are easily talking about a range of a quarter of a million to $5 million dollars. Not a decision to take lightly. To show commitment to the purchase the buyer is asked to deposit a “Good Faith” deposit into escrow upon seller acceptance of the offer. Typically, the good faith deposit is 3% of sales price and on a $500,000 home that equals $15,000. Therefore the real estate purchase offer inherently includes “escape routes” called contingency periods to help the buyer investigate the property, review disclosures, obtain an appraisal and final loan approval before solidifying the contract to purchase.
The California Real Estate Purchase Agreement indicates a standard of 17 days for physical investigation, appraisal and loan approval contingency periods. These time periods are suggestions and may not reflect the “norm” for the local real estate market. To make an offer more assertive these contingency periods can be reduced drastically or removed completely. Sometimes, the seller has already completed inspections and the buyer has reviewed this information before writing an offer. This may lead to writing an offer with no physical contingency either because the buyer is comfortable with the condition of the home and satisfied with the neighborhood or they may simply be purchasing the home AS IS with no expectation of the seller to make any repairs.
Deciding to remove the appraisal and loan contingency from the purchase offer on a home can come about because the buyer is purchasing with all cash. Recently, due to a low number of homes for sale, particularly in highly sought after neighborhoods, we are beginning to see multiple offers. Multiple offers on a home for sale tends to push up the price as buyers compete to win the bid. Because price point does create a limit for most buyers, no contingencies become a way to strengthen the offer without pushing the price higher. One strategy to win an offer is to bid up the price and then re-negotiate the price once the appraisal comes in and sets the a value. However, the appraisal is the lender’s perception of value. Market value is what a seller is willing to sell for and what a buyer is willing to pay. If the appraisal comes in less than offer value, the seller either must reduce the price for the buyer, the buyer must bring in the extra cash to secure the loan, or cancel the contract. If the buyer has written an offer with no appraisal or loan contingency, their deposit could be at risk if they decide to cancel the contract.
Today’s technology has helped the buyer significantly by publicly displaying most recent sales and market trends for the neighborhood. When a market is changing quickly, these online numbers may not be able to keep up with current activity in a certain neighborhood. Equally, the appraiser normally looks at the last 3-6 months of sales within a one mile radius of the home. If the home is unique or the sales activity low, the appraiser relies more heavily on comparative adjustments. No appraiser is perfectly accurate, and no real estate market is stagnant.
A seller counters back on an offer(s) to remove contingency periods to reduce the risk of the buyer canceling the offer to purchase and delaying the sales process. A buyer applies contingency periods to reduce the risk (an post offer acceptance negotiation power) of losing their good faith deposit if the offer changes based on condition or value. There are cases where the risk is worth it. There are cases where the risk is too much. Each buyer’s situation is different and there are moments where the risk is low and the desire is great and writing an offer with no contingency can work. Before writing an offer with no contingency periods, understand the worse case scenario. Evaluating the risk thoroughly is the best way to determine how aggressive your offer needs to be and what the ramifications could be if it all goes wrong. In some cases, the risk is well worth the reward of winning the bid on a home you know is the best one for you!
If you would like to discuss in more detail about the current housing market and strategies to have your offer accepted with minimal risk, ask me for a no-hassle, no-obligation consultation.