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Think Smarter with Nick. May 2021.

Posted by Greg Kiep on Friday, May 21st, 2021 at 12:51pm.

Think Smarter with Nick

This month Nick gives his advice to buyers looking to make a move this spring/summer. With a highly competitive Boston real estate market, it can be challenging, but there are ways to be competitive and purchase the home of your dreams!

There is a lot of talk about “contingencies” right now - can you explain these?

Contingencies are clauses in an offer that define a condition or action that must be met for the purchase contract to become legally binding.  

Typical contingencies buyers use in offers include:

  • Inspection Contingency - Allows the buyer to have a professional home inspector inspect the property and then decide whether they want to move forward with the purchase, potentially renegotiate the price/terms, or back out and have their offer deposit refunded.  This contingency deadline is usually within a week from the time the offer is accepted.

  • Financing Contingency - This gives the buyer time to apply for and receive a mortgage commitment from a lender.  It protects the buyer by allowing the buyer to cancel the offer and get a full refund of their deposit if the lender denies them financing.  This contingency deadline is usually about 30 days from the offer acceptance date. Still, it frequently needs to be extended if the bank doesn’t have all the necessary information to issue a mortgage commitment or denial letter.

  • Appraisal Contingency - In addition to the financing contingency, the appraisal contingency protects the buyer in the case where the property does not appraise at or above the offer purchase price.  The buyer then has the option of canceling the offer and getting their deposit back.

  • Satisfactory Condo Document Review Contingency - This contingency allows the buyer to review the condo documents and financial statements of the condo association.  After review, they then have the option to continue moving forward with the transaction or backing out and getting their deposit back.  This contingency deadline is generally the same as the purchase and sale signing (approximately 10-14 days from offer acceptance.

  • Home Sale Contingency - When buyers know they can’t afford to own both homes simultaneously, this contingency gives them time to sell their current home before closing on the new one.  The deadline for this contingency is sometimes very close to the closing date.

From a buyer’s perspective, all of these probably seem like things you’d want to include in any offers you make. Still, you have to understand that sellers typically consider offers containing contingencies protecting a buyer as weaker and are less likely to accept them.

Right now, most of the talk regarding contingencies is about waiving them to make offers stronger and more likely to get accepted.  Before deciding if this is something you should do, you must understand what is at risk.  Should you choose to back out of the transaction and have no contingencies protecting you, your deposit funds, which can range from $1000 to hundreds of thousands, could be kept by the seller as damages.

However, in some cases, especially in highly competitive markets like the one we are currently in, waiving contingencies is the only way to get your offer accepted.  In these cases, you must decide if the rewards outweigh the risks.

As always, my suggestion is to talk through this with your agent and make sure you completely understand the situation before deciding on whether or not you should include or waive any contingencies in your offer.

How necessary is a pre-approval or proof of funds for a buyer in today’s market?

In today’s ultra-competitive market, if you want any chance at all of having your offer accepted, you need to submit a recent pre-approval or proof of funds with your offer.  Our recommendation is also to make sure the pre-approval is from a well-respected lender.  Some lenders have reputations as difficult to work with or who over promise and underdeliver, making your offer look weaker vs. others in multiple offer scenarios.

Regarding proof of funds, this can be in the form of an account statement showing enough liquid funds in the amount of or greater than the purchase price.  Before sharing the account statements, the account numbers should be redacted, but it should still show the purchaser’s name so that the listing agent and seller can verify it.  Another option is to have the purchaser’s banker write a letter confirming the amount of funds available for the purchase.

As always, I suggest asking your real estate agent if they have any lenders they recommend and at least considering them for the pre-approval.

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