How to Stand Out in a Bidding War—Part II

April 1, 2017

Waiving the Financing Contingency

As mentioned in my last post “How to Stand Out among Bidding Wars?—Part I,” it is important to waive the inspection contingency when making an offer in a competitive market. The inspection contingency waiver is almost like the default, or basic requirements for some competitive markets. You probably heard seller’s agent say that their winning offers are waiving all contingencies. Usually, what this means is that buyers have waived inspection and financing contingencies. If it’s a condo, often I got phone calls from seller’s agent saying that they wouldn’t consider the offer if it contains the clause “subject to satisfactory review of condo docs.” So in many cases they want you to waive the condo contingency as well.

The more contingencies you have in your offer, the more protection you have as a buyer. Contingencies basically mean that your offer is contingent upon the satisfactory result of these conditions. Your transaction is only completed if certain conditions are met—inspection, financing and condo doc reviews. The more contingencies you have, the less committed your offer is to the seller. The fewer contingencies you have, the more solid your offer is to the seller, and the more confidence they have that this transaction will actually go through. Sellers don’t want the property to go back on the market if the deal falls through because if it does, they can lose money from the sale.

So what is the financing contingency? Why do buyers waive the financing contingency to make their offers more competitive?

A financing contingency is a clause in the offer that protects the buyer from losing their deposit if their deal falls through. When a buyer applies for a mortgage, they have to get a pre-approval letter from the bank or mortgage company stating that they can qualify for that amount of loan. However a pre-approval letter doesn’t mean 100% that the buyer will be able to get that loan.

There are many factors that can cause a loan application to fall through, and the appraisal is one of the most common reasons. When a buyer applies for a mortgage, the lender orders an appraisal for the property the buyer is buying. The bank then offers a loan based on 75%-80% of the value the property is appraised at. In many cases, and especially in the city where appreciation happens rapidly, the number the property gets appraised at is much more conservative. The property gets bid up at a price that is much higher than the appraised value. The appraisal industry hasn’t caught up with the rapid price growth that’s happening in an area. So in those situations the appraisal would come lower than the price accepted in the offer.

If the buyer cannot come up with the cash to cover the difference between the appraisal and the pre-approved amount, the financing would fall through. The transaction cannot be completed, so the seller has to put the property back on the market and lose money. There are other factors that could cause financing to fall through as well, such as pending litigations or slow processing of the bank. Your real estate agent should be able to advise you on how to avoid such pitfalls later to make your transaction as stress-free as possible.

From this standpoint, we can see that financing contingency can be a lot of risk for the seller. That’s why an offer with a financing contingency waiver is as good as a cash offer. By waiving the financing contingency, the buyer is basically saying that they will still be able to buy the property even if the appraisal comes low.

However, waiving the financing contingency presents a lot of risk to the buyers. If the deal falls through, the buyer can lose their deposit. A buyer should discuss their financial profile with their lender before waiving the financing contingency. They should also discuss the condition of the property with an experienced realtor, who can research the property history for any red flags that could affect the financing.

There are some ways the buyer can make their offer more competitive without waiving the financing contingency. An experienced realtor can offer you unique strategies that help you stand out.