Non-contingent offers can make a buyer's offer more attractive to a seller and in the recent past, they were very common. The problem is, this strategy comes with significant risks. Buyers should carefully weigh the potential drawbacks and seek expert legal and financial advice before making a non-contingent offer.
Key Points for Buyers Considering Non-Contingent Offers
Assumed Risks: Without the protection of contingencies, buyers risk losing their deposit or paying damages if they back out after the offer is accepted, as there may be no contractual right to cancel. My father taught me long ago....if you can't afford to lose the money, don't take the risk.
Advisory Forms: The California Association of Realtors (C.A.R.) provides a form, the Non-Contingent Offer Advisory), which outlines the risks of making a non-contingent offer. This form helps agents discuss these risks with their buyers and includes a recommendation that buyers avoid non-contingent offers unless they fully understand the implications.
Loan and Appraisal Contingencies:
Loan Contingency: If the buyer cannot secure financing, they must cover any shortfall in cash. Without this contingency, the buyer cannot cancel due to lack of funds without breaching the contract.
Appraisal Contingency: If the property does not appraise at the agreed price, the buyer may not obtain the necessary loan amount or may have to bring additional cash to the table.
Investigation Contingences:
If you ask for an investigation period, you have the opportunity to research the history of the property and bring in experts to determine it's integrity. These professionals can provide estimates for potential repairs or confirm that the property is in good condition. Without the contingency period, you do not have the right to ask for repairs or request a price reduction and the seller has no obligation to make any repairs. The buyer must either proceed with the purchase and pay for repairs or risk losing their deposit and facing additional damages.
Liquidated Damages Clause
A liquidated damages clause requires the buyer to pay the seller an agreed amount if the buyer fails to perform. For residential properties, the buyer’s deposit is typically considered a reasonable estimate of damages if it does not exceed 3% of the purchase price. That is a substantial amount of money which nobody wants to lose!
Insurance Contingency
Home/fire/flood insurance has become a hot topic in real estate these days. With an increase in severe storms, drought, and wildfires, getting insurance is more challenging and buyers are finding that some companies are no longer providing insurance in certain areas and certain states. With this concern, it's imperative that you investigate insurability and costs. Lenders will require proof of insurance to fund your loan and they will need to include the payment in your debt to income ratio. Without insurance, you won't be able to get a loan.
Advice for Sellers Accepting Non-Contingent Offers
Sellers should verify that buyers have sufficient funds for a down payment or the entire purchase price, especially if the offer is all-cash or without a loan contingency. Additionally, sellers should provide all necessary disclosures upfront to avoid giving buyers a statutory right to cancel later.
Non-contingent offers can be appealing but they come with significant risks. Buyers should fully understand these risks and make sure to consult your agent/loan officer before waiving any contingencies.
