Did a Hot Market Push Out Contingencies out of the Sales Contract?

The coronavirus-caused decreased rates and telecommuting left the US housing market in an unexpected state. Lowered rates heated up the market so much that the regular homebuyers got repeatedly priced out of homeownership. Recently, real estate agents have begun publicly advising buyers against one of the most threatening consequences of this market - waiving contingencies.

Contingencies are clauses of the sales contract that offer a way out of the sale for the buyer in case of any mishappenings, either with their financial situation or the state of the property. These clauses essentially save the earnest money that a buyer put on an escrow account as a sign of goodwill.

For example, inspection contingency vouches that a buyer can back out if there are any undisclosed major issues on the property. Title contingency saves buyers’ earnest money in case there are any ownership problems or liens on the property.

Pandemic Induced Contingency Waivers

After having their offer reduced a few times, and losing several bidding wars, the buyer’s budget was getting stretched out too thin. They realized that in order to get the house, they’ll need to offer more than money. So, in order to appeal to the buyer, they waived contingencies.

One of the most important contingencies for the borrowers is a mortgage contingency. It shields their earnest money in case a lender doesn’t approve their mortgage application. This was one of the most frequently abandoned contingencies.

As the home prices grew over all records, sellers were afraid that they would not be able to buy a new place if they let their buyers off the deal. Basically, they didn’t want to risk that an unapproved mortgage increases the time their place spends on the market.

Buyers were eager to please the seller, because of the high competition and sellers were starting to expect waived contingencies as a part of an offer. Many real estate agents advised against doing this, especially regarding title and inspection clauses - as there can be many unpredictable costs if the seller hasn’t disclosed the issues.

There is Hope for a Balanced Market

Rising rates are slowly ending the bidding war statewide. The rates circling around 6% are also guilty of houses’ staying on the market way longer than a few months ago. The average length of the active listing is doubling by the month and is now at 26 days.

The first thing that buyers did when they felt the belt loosening around them - they stopped waiving the loan approval contingency. Partly because they have more choices, and partly because they are frightened that the new rates might change the outcome of their approval.

Some real estate agents from Orange County are reporting that their clients started denying asking prices that go merely $15,000 above their bid. This is something that wouldn’t happen only a year ago.

Appraisals are starting to affect the negotiation process. If the appraised value stands lower than the asking price, buyers are less likely to overpay in these conditions. Whereas, a year ago, an appraisal process would matter only if the discrepancy between the appraised value and asking price is huge.

There is most likely a mild recession coming, some real estate professionals say. However, it is nothing to worry about and should not be compared to the Great recession of 2008. Others have even more optimistic market predictions and say that the rates and the supply influx will create a balanced market.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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