Do I Need to Waive Contingencies In My Offer?

You may have heard that in the Bay Area you have to waive all contingencies in your offer to even be considered serious. There’s some truth to this, at least in today’s red hot Bay Area market, but - as with many things in real estate - it isn’t quite that simple.

Yes, many sellers will expect buyers to submit offers with contingencies waived. But that’s only part of the story. The Bay Area market has evolved such that buyers and sellers are often able to satisfy themselves - before they submit an offer - that contingencies won’t be necessary.

Way back when, it was traditionally the buyer’s obligation to order and receive whatever inspection reports she desired, and to arrange for those inspections to be performed in the escrow period between signing and closing. Accordingly, a prudent buyer would submit an offer, but include an inspection contingency, such that if an escrow-period inspection revealed an issue with a home, the buyer and seller could either negotiate to figure out how to address the issue or, if serious enough, the buyer would retain a right to exit the transaction and walk away without penalty. Sellers understandably didn’t like signing up for sales with the possibility that the buyer could raise an issue - however small - and renegotiate the transaction between signing and closing. So Sellers began ordering their own third party inspection reports and including them in the disclosure materials available to all prospective buyers while the home was being marketed and shown. That’s why nearly every disclosure packet available for Bay Area homes will already include independent, third-party inspections, such as a contractor’s inspection, a pest inspection and (in some cases) a stand-alone roof inspection as well. By providing these materials in advance, both buyers and sellers can review and address any issues revealed by each report. Accordingly, Bay Area sellers expect that buyers will have satisfied themselves as to the condition of the home before they submit an offer, which in turn allows sellers to expect that buyers will be comfortable waiving the inspection contingency in their written offers.

Financing contingencies have evolved similarly. In today’s lending environment, mortgage lenders do the bulk of the work to evaluate buyer’s creditworthiness before buyers submit offers on homes. This is evident in the pre-approval process: prospective buyers submit exhaustive personal and financial information to lenders in order to allow lenders to evaluate their creditworthiness and issue a pre-approval letter. The process can often take time, but the result is a robust pre-approval letter that should give buyers a high degree of confidence that financing is available to them on the terms and conditions set by a bank or other lender, all before the buyer submits her first bit. And in turn, when buyers are confident about their financing picture, they should feel more comfortable waiving a financing contingency in their written offer. Of course, a pre-approval letter doesn’t absolutely guarantee that a given loan will be available at closing, but in our experience, robust pre-approvals from reputable lenders can generally be relied upon with confidence.

The last of the three typical contingencies is the appraisal contingency. Typically, mortgage lenders will insist that an independent home appraisal be done before closing. This gives lenders confidence that the value of the home is sufficient to repay the mortgage loan if the borrower defaults and the bank has to foreclose. An appraisal contingency allows buyers to walk away from a deal if their lender’s appraisal is materially lower than the price the buyer has offered to pay in her offer.

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