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Ready to Make an Offer: The Risk of Removing Contingencies

Typical real estate offers include several standard contingencies - inspections, appraisal, and loan approval. In a fast-moving seller’s market like the one we are experiencing now, one of the ways to make an offer more appealing is to remove some, or all, contingencies. At the onset of escrow, buyers deposit an initial deposit, usually between 1 - 3%, in escrow as a good faith deposit. The three contingencies allow the buyer the opportunity to cancel the transaction and still be entitled to the return of their deposit; however, once these contingencies are removed in writing, if the buyer were to then default (or cancel), the seller would be entitled to the deposit.

The three most important contingencies include:

• Inspections – including a general home inspection, mold, well/septic, structural, geological, review of seller disclosures and reports, HOA documents (if any). If this contingency is waived, the buyer is agreeing to accept the home AS-IS regardless of what is discovered by inspection and investigations

• Appraisal – if this contingency is waived, the buyer is agreeing to make up any difference should the appraisal come in below the purchase price

• Loan – loan rate, terms, and final loan approval. If waived, the buyer (and lender) are stipulating that the loan is fully approved without conditions

Any, or all, of these items can create problems during the escrow period. Without the contingencies in place, the buyer is obligated to conclude the sale or possibly be subject to forfeiture of their deposit. Most of the United States is experiencing an advancing market. This means prices are rising at a steady pace. As a result, both buyers and sellers expect to settle on a sales price higher than recent, comparable sales. Buyers are desperate to have offers accepted and are willing to compromise on contingencies designed to protect them. In the right scenario, removing contingencies with your offer can be the right thing, but it is important that you thoroughly review all contingencies or the waiver of them with your agent prior to making an offer.

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