One of the most important parts of the real estate transaction is in my opinion one of the least understood, at least when one first enters into the realm of a real estate purchase or sale, we're talking contingencies. This particular Blog is for those of you who are SERIOUS buyers, but have little to no money to put down on your home. Putting money down on a home usually makes your offer, at least in general, attractive to the seller. It makes you look serious. Well, how do you look serious with NO MONEY? I'll tell you how...please read on.
First, a background on what this contingency stuff is anyway. A real estate transaction, deal, purchase, sale - whatever you want to call it, is usually contingent upon several FACTORS, in order for it to successfully close escrow, finalize, be done, get finished, etc! Its usually the RICH buyer, or very SERIOUS buyer that has little or NO contingencies. But, this blog is for the not so rich. So lets discuss the most prevalent contingencies that you will likely have in your offer.
1st) Your LOAN CONTINGENCY - this contingency means that you, the buyer, must acquire financing (a loan) in order to close this deal. In other words you can't buy the home with out it...so the entire deal is contingent upon this happening.
2nd) Your APPRAISAL CONTINGENCY - this contingency means that the home you are buying MUST appraise at its sales price (or higher would be nice). In other words, if you buying a home for $400,000, you don't want the appraiser to come back and report to your lender that its only worth $350,000! Mr. Lender won't give you $400,000 if that happens!
3rd) Your INSPECTION CONTINGENCY - this contingency means that you, the buyer, MUST take the time to discover everything about the homes condition and the community in which its located. Your going to learn about the home via a home inspection most often, sellers disclosure paperwork, your own visual tour, looking at permits if any, calling any specialist in the world such as a geologist, surveyor, mold inspector, and the list can go on forever if you really want it to. Most people however simply opt for a home inspector to issue a report on the homes condition, and you then decide if its worth going forward or NOT with the deal. That is why its a contingency. No one is going to make you buy a home that is falling apart or you no longer feel comfortable about.
So what is the catch to these contingencies? Whats the big deal anyway? The BIG DEAL is that these contingencies need to be removed by a certain date as specified in your purchase contract. And by removing any one contingency, you as a buyer can no longer back out of the deal for that particular contingency (reason). SO, if you hook up with a lender who says on the 14th day of escrow - "yeah, your fine, remove the loan contingency, everything is smooth on this end" ...and you remove the loan contingency based on his/her advice, only to find out that he/she can't fund your loan on-time or at all because they made an error in your approval, OUCH, that'll make a good day bad. That means that you can't back out of the deal due to your financing. Same with the home inspection contingency removal. If you remove this contingency, and then realize that all the repairs your already aware of costs to much, well.. you can't back out anymore for any such reason related to the homes condition, because you removed the contingency already! You may lose your initial deposit if you back out anyway - which is generally thousands of dollars.
Thats just the loan and inspection contingency removals, you of course have to remove the appraisal contingency too - but that usually goes hand in hand with your loan removal since you really can't get the loan you want with out the home appraising at the sales price. You generally remove them all at the same time with one signature, but it can all be removed separately if need be.
So now that you have an idea how what these contingencies are all about, lets discuss how they can actually help you, the not so rich buyer, make a more competitive or attractive offer as the Subject suggests.
I mentioned that you have to remove the contingencies by a certain date. There is NO set date until its agreed upon between the seller and you within the purchase contract. It is built into the purchase contract however that you, the buyer, have 17 days to remove the loan and home inspection contingencies. If your writing up this offer, on a home you just have to have, the last thing you want to happen is another buyer come along at the same time and make an offer that you must compete with. What if they put more money down than you are!? You likely don't have a chance right? Wrong.
Aside from writing an offer at FULL PRICE or a very competitive price, you very well may want to minimize the days you are going to take to remove your contingencies. So, instead of the built in 17, say to your Realtor ..."lets remove the loan contingency in 12 days, or 10 days, and do the same with the home inspection contingency". Not only will your Realtor think to themselves how great it is to have a SERIOUS buyer, but SO WILL THE OWNER of the home, and their listing agent! Trust me, you will surprise your Realtor when you offer to minimize the time frames. They tend to think, and they tend to be right, most buyers don't understand them, no less what to DO WITH THEM! You can even take the credit for being so savvy.
So, you write your offer, and so does the guy (buyer #2) with MORE MONEY down than you! Uh oh. They get delivered at the same time to the owner. Which will he chose? Well, there is no RIGHT answer. The odds are against you due to the "no/little money down thing", but here is what I would be hoping for:
- Buyer # 2 may be coming in at the same price as you, or probably lower!
- Buyer # 2 hopefully did not "mess" with the time frames for contingency removal, and left them as they are built into the contract (17 days)... they can even opt for longer if they wanted to!
- Buyer # 2's Realtor hopefully has No rapport with the Listing agent, and or, does not package the offer attractively, by doing such things as writing an enticing Cover Letter why his client's offer should be chosen, or producing a letter from his clients to the seller pointing out why they should be chosen! You want to appeal to the owner and listing agents senses!
- Buyer #2 maybe, just maybe, MUST Sell their current home in order to buy their new one. Maybe they don't even have to since they have lots of money, but that is how they want to do the deal!
The seller will then look at your deal, all be it with not a lot of money down, if any, and compare it to Buyer #2's offer. First off, the listing agent is going to deliver your offer in a nice package to the seller, because you are going to choose a Realtor who will do that for you! Binding and all! Second, the seller will read your enticing introduction letter as to why you love his/her home so much and would love to be the new owner. Third, the seller will see the details of your offer. They will see that you offered a good price. They will see for a moment that you aren't putting a lot of money down. But then that QUICKLY gets over shadowed by the fact that your offer just got much more SERIOUS by you shortening the Contingency time frames. This tells the seller that you are not going to WASTE his/her time! Instead of them having the home off the market for more than two weeks for you, they will only have it off for a little over 1 week before you decide to remove your contingencies and move forward with the deal. This will make him/her sleep much easier at night time.
And wah-lah... you have yourself a VERY good chance at getting the deal now. All because you were flexible and knowledgeable.
I will caution two things however. First, if your credit is shakey, I would make sure to team up with a great lender who will advise you on how long it will take to give you a final loan approval. You don't want to remove your loan contingency before its okay. And people with shakey credit will sometimes run into bumps in the road with respect to loan approvals. Second, make sure you are diligent with getting your home inspection ordered right away so there is ample time to consider the homes condition and everything about the area before you remove the contingency in say 10 or 12 days.
Many more tips where this came from. I hope this will help "some" of you.
For all your real estate needs, call Robert @ 661 373 2374.
Visit Robert @
www.TheScvAget.com for more information on Santa Clarita real estate.
