In the first four posts in this series on writing an offer when competing against multiple offers to purchase a Silicon Valley home, we focused on the financial terms. In the next few posts, we’ll address the non-financial terms that can “sweeten the pot” to help you succeed – without giving away all your rights!
Price & terms work together like the scales of justice. When they are “level” to each other, you have a normal sale with a good reflection of market value (normal terms, normal price). If one is low (poor), the other will need to be high (good) to “even out” the balance. If the terms are fantastic, the seller may sell the home for a little less or may pick that offer if there are multiple bidders. If the terms are terrible, the seller may only sell the home if it sells for a bit more to compensate for the terms. With multiple offers, sometimes you can only go just so far with price. But often you can improve your offer with the right terms.
Today we’ll focus on contingencies specifically. Contingencies are not the only terms, but they’re among the most important terms in your offer to buy a home. We’ll look at both which contingencies may be involved in your offer and potential transaction, and how much time (how many days) to allow for each. In my opinion, you should never write an offer with NO contingencies. It is just too risky!
What’s a contingency?
It’s something that must be done or obtained for the sale to move forward. It is a “way out” of the sale if the contingency issue fails. The sale is “contingent” upon the buyer getting the loan – or whatever the contingency may be.
When we refer to a “contingent offer“, that usually means that the sale would be conditioned upon the buyer being able to sell another home. That is perhaps the least desirable contingency as far as a seller is concerned, but even within contingent offers, there are several levels of risk. We’ll come back to that in a moment.
The normal contingencies are on the buyer’s side and they usually involve the loan or the property (or area). The seller may have a contingency if it’s necessary to find a replacement home. Or a seller will have a contingency if it’s a short sale: the sale is contingent upon bank approval (and the seller accepting the bank’s terms).
The regular home buyer contingencies in Santa Clara County are these:
- Finance (obtaining the loan or loans)
- Property Condition (beyond the structure too)
- Title Documents
- Property Disclosures
- Homeowner’s insurance (ability to obtain it)
- Lead paint inspection (opportunity to test for it)
- Homeowner association documents (get & review documents)
Generally, they tend to be lumped together as finance (loan and appraisal) and property condition (everything else) contingencies.
Finance: The loan, or finance, contingency is for your deed of trust (we don’t usually have mortgages here, though we refer to the loan by that name). Please note: your having the down payment is NOT a contingency! Need to get the money from your parents, or from the stock market, or from an anticipated bonus at work? If something happens and you can’t, you may be in default and risk suffering financial penalties if you cannot close on the transaction because that part of your financial package fell apart. Both contracts used in our area specifically inform you that obtaining your deposit and down payment are not a contingency. Don’t be confused – the financing contingency ONLY refers to your getting the specific loan you write into your offer.
Some contracts distinctly name an appraisal contingency (the CAR contract), and in others it is assumed to be part of the loan (PRDS contract). The two forms we use in the Silicon Valley area are similar but not identical so be sure you are clear on what may or may not be covered by the form you’re using.
How many days should you allow for your loan contingency? Ask your lender. It used to be that we could remove a loan contingency within 7 days if the buyer were truly pre-approved. Now, though, it’s taking a little longer and 10 days is about as aggressive as you can probably go with a conventional loan. Got an FHA loan? You may need 17 or 21 days. Some other, more complicated loans may require 30 days.
The longer you need, the worse your offer will be viewed by the seller, of course. To compete in multiple offers, you’ll want to be truly pre-approved and be able to move quickly.
Unless yours is an ALL CASH OFFER, I would suggest that you do not ever write “0” in your days for the finance contingency. It is just too risky – the market can change and you could be on the hook if your loan falls through and you have no contingency to protect you. Find out what’s doable, do your best to make that aggressive but not unreasonably short or long.
What happens in multiple offers? When there are several offers, if some of them can remove all contingencies in 7 or 10 days but you need 17 or more, your offer will be viewed less favorably. On the other hand, if everyone else is requesting 17 days or 14 days and you can perform in 10, your offer is stronger. But only commit to what you can do! Always, always talk to your lender before deciding how many days you need.
As mentioned in an earlier post, unfortunately if you have a non-conforming loan that needs extra time or has extra issues such as FHA, it will be very hard to compete in multiple offers.
Property condition contingency: This refers to your investigation of the home (house, condo, townhouse) and anything that may materially impact value or desirability to you. So it’s the structure itself but perhaps also the local schools (are the scores good, the student-teacher ratio good, is it impacted?), the neighborhood, the natural and environmental hazards, and much more.
How many days do you need? It really depends: did the seller do presale inspections and complete disclosures prior to receiving offers? (If so, hopefully you read them.) If the answer there is yes, then most of the offers will probably have fairly short timeframes for this contingency – most likely in the 5 – 10 day range. If you ask for 14, 17 or 21 days when all the info was available upfront, your offer will be poorly viewed on that count.
If the home is a short sale, there may be disclosures but no inspections. Allow a reasonable (but not excessive) time to get all inspections done once there’s bank approval.
If the home is bank owned, you will not get any disclosures that are of any help to you at all. You absolutely must inspect this property to a fare-thee-well because that’s the only way you’ll know anything about the home. Allow plenty of time.
You can always call your inspectors prior to writing an offer and check on their availability for the week ahead in case you do get into contract. I have many times had my inspectors “pencil me in” ahead of time. It’s a big help and peace of mind to know we can do the inspections in a timely manner.
What if you have to sell your home to buy the next one? If you need to write a contingent offer, understand that there are really four levels to it:
1 – you need to sell and close escrow on your home, but it’s not yet on the market
2 – you do have your home on the market but it has not get received an acceptable offer
3 – your home is on the market and is in escrow but the buyers have not yet removed their contingencies (so they might still back out)
4 – your home is sold and the buyers have removed their contingencies, but still must close escrow
If you want to buy your move-up home, please understand that the more risk that’s involved to the seller of the home you want, the less interested that the seller will be in taking your offer. There’s a huge range of risk in the four scenarios above. Lots of risk in #1 above, hardly any risk in #4 above. My usual advice to my clients is to hold off on writing an offer until the buyers on their home have removed contingencies. Otherwise you’ll have to pay lots more (possibly lots more than the home is worth) to woo the sellers into accepting your offer in any case, and in multiples you’ll get cut in the first go-round.
There are a couple of hurdles with a contingent offer. First, it’s getting the seller to consider taking it at all. Then it’s whether or not you can avoid being stuck with an immediate “kick-out clause”, meaning that if the seller gets a better offer, your offer can get booted.
We have two sets of forms (as I keep saying) in use in our area: CAR and PRDS. The addendum that each use for a contingent offer is slightly different. One of them always provides for a “kick out clause” so that the seller can take a better offer if it comes along. The other one doesn’t. As a buyer with a San Jose area home to sell, you probably care a great deal as to whether or not you have any “protection period” for getting your current home sold and closed so that you can’t be kicked out. If you don’t like the verbiage in the addendum relating to the sale of your current house or condo, make sure that you ask if another form is available.
With a contingent offer, if your home is sold and has contingencies removed, it will be viewed favorably if there’s not much time between when you present your offer on the home you want and when your current home is set to close escrow. The longer the wait, of course, the more the risk that something – anything – could happen.
To summarize, if you’re writing an offer in a highly competitive multiple offer situation, you’ll want to have a good grasp of which contingencies you want (or need) and how much time you’ll need for each. If you have more contingencies and longer timeframes, your offer will be strategically disadvantaged. Do not, however, be pushed into writing “zero” contingencies – that would mean giving away all of your rights and safety nets, and no home is worth it!
(The series on multiple offers will continue – check back for more on “terms” soon!)