This week I’m having a deja vu from 2000. If you were here in Silicon Valley then, during the “dot com boom”, you remember a frenzy with the hot sellers market, of home buying with multiple offers, and prices rising rapidly.
In some parts of the market, it’s back.
One of the ugly parts of that market is back too, the “non-contingent offer“. I’m not talking about offers subject to the sale of another home (aka “contingent offers”). I’m talking about home buyers waiving their inspection contingency and their loan & appraisal contingencies. (Not clear on home buyer contingencies? Please see my article: “Competing against multiple offers: contingencies and timeframes“.)
Listing agents know better than to give a counter offer demanding a non-contingent offer; that’s a lawsuit waiting to happen if the buyer feels coerced and later gets some sort of nasty surprise. But boy oh boy, do they know how to hint that it’s what they want. And that’s not a lot different from demanding it.
The Market Conditions Advisory
Silicon Valley home buyers are given many disclosure and contract papers to sign when submitting their bids to purchase residential real estate. It is important to read and understand them and the risks about which they warn. One disclosure which is used – or should be used – on most every transaction is the “market conditions advisory“, which warns of risks in multiple offers and some of the ways that buyers may try to have the winning bid that may not really be a good idea in the long run. The full name of the form is this:
ADVISORY REGARDING MARKET CONDITIONS,
MULTIPLE AND NON-CONTINGENT OFFERS,
FINANCING/APPRAISAL AND PROPERTY CONDITION
This entire 2 page form is worthwhile reading & comprehension, but let me bring just a couple of points forward about non-contingent offers:
“. . . a Buyer whose offer is fully “non-contingent” – – wherein all contingencies are waived – – foregoes important protections. Among these is the right to cancel the contract based upon an inability to obtain financing or upon a post-acceptance discovery of serious physical defects and other problems. It is important to note that the discovery during escrow of previously unknown defects does not (absent fraud) create for the non-contingent Buyer a new right to terminate the contract.”
So with non-contingent offers, there’s no backing out without risking the entire initial deposit, which normally is about 3% of the purchase price.
Non-Contingent Offers: What are the Risks?
How risky is it? That answer depends in large part on how much information the home buyer is provided up front. How thorough were the pre-sale inspections? Are there any major red flags noted, or important further inspections recommended – such as a foundation or drainage inspection? The form states:
“Risk factors vary in each transaction and must be thoughtfully considered in each case. For example, where a non-contingent buyer has access to a seller-provided pre-sale disclosure “packet” containing essential inspection reports produced by reliable, reputable professionals, the risk to that buyer regarding those issues is far lower than it would be where no inspections have been undertaken at all. The latter involves maximum risk, and is strongly discouraged by Broker.”
For San Jose area home sellers who would like to receive a non-contingent offer, the odds are increased if you do thorough pre-sale inspections: home, pest, roof, chimney, and possibly others (pool or?).
For home buyers, you need to be aware that other motivated consumers may be throwing non-contingent offers into the pile, and it can be a game changer in multiple offer situations. The more homework you do upfront, the more carefully you read the disclosures and inspections prior to putting a contract on the table, the more comfortable you may be swimming in this sea of sharks. Personally, I cannot recommend a non-contingent offer and I don’t think that I would ever do it myself. But in some cases, unfortunately, that may be what it takes to beat the competition right now. That’s a personal choice you will need to make should you be up against a lot of multiples.