Business & Real Estate

On the Market: Noncontingent offers, explained

Given today’s real estate market, homebuyers have asked for an explanation of noncontingent and contingent offers when purchasing a house or condo.

Q: What does “noncontingent” mean? If I want to make an offer to buy a house, does it have to be noncontingent?

A: First, some history. Purchase contracts used to have an automatic three-day right of rescission built into them. That meant you essentially had three days to change your mind after both buyer and seller signed a contract. That regulation no longer exists. Now, the buyer is able to include contingencies in their purchase offer that are negotiated and agreed to by the seller. A contingency is something that has to happen before something else happens. In a real estate transaction, it is typically something like: “I want to bring in a home inspector to check on the foundation. If I don’t like what they say, I reserve the right to cancel the contract and get my deposit back.” The buyer also could try to renegotiate based on the results of the inspection.

Q: What are typical buyer contingencies?

A: Usually they relate to checking on the condition of all or part of the property/building itself or the buyer’s ability to secure a loan or have the property appraise for the offer price.

Q: Could there be seller contingencies?

A: Yes, the one I see most often is: “I need to find a house to move to, and if I can’t within 60 days, I don’t have to sell you my house.”

Q: Are there any other contingencies?

A: Yes. There are some requirements/disclosures that a seller must provide and, depending on when they are provided, the buyers might have an option to cancel the contract. An example of this would be that after the buyers had removed all of their contingencies, the sellers would provide some additional information – for example, “Oh, I forgot to tell you that there is a big crack in the foundation.” Don’t laugh – this happens all the time! In this case, the buyers would probably have the right to cancel the contract if they wanted.

Q: What does a noncontingent offer look like?

A: In a market where there are lots of buyers and few sellers, buyers will try to make their offers more appealing to sellers by eliminating any opportunity for the buyers to back out of the contract after it has been agreed to by everyone. This has obvious drawbacks for the buyers, but it is often what needs to be done to win when buying a house these days.

Q: Are there risks in making a noncontingent offer?

A: Definitely. Your agent will advise you ahead of time about potential risks, and you should read all of the seller disclosures very carefully so that you have an understanding of what some of those risks might be. The bank will appraise the house to make sure you are not offering over market value. If the house you want to buy doesn’t appraise and you don’t have an appraisal contingency, you probably still have to buy the house. You’ll just need to come up with more cash to cover the shortfall.

Q: Why do buyers make noncontingent offers if they carry a risk?
A: It is very common in multiple-offer situations for a buyer with contingencies to lose out to another buyer who has submitted an offer without any contingencies. After losing out two, three or four times, buyers often understand that they will have to accept a certain level of risk.

There are ways to better understand potential risks before making an offer, and this helps alleviate some of the worries if, for instance, you have reviewed a worst-case scenario and are OK with it.

Owen Halliday is a longtime Los Altos resident and manager of the Sereno office in downtown Los Altos. Email comments, questions and potential column topics to [email protected] For more information, call 492-0062.

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