Removing Contingencies: Appraisal, Loan, and Inspections


This is one where my thinking has "evolved". In fact, my earlier posts may have taken a distinctly different position. Specifically, I am referring to removing the appraisal, loan, or inspection contingency with the offer submission or in response to a counter offer. This can either take the form of checking off the box that says the purchase is not contingent on the property appraising at the sales price or actually using the contingency removal form and checking off appraisal. You have the same option with loan. Most likely the best way to remove the buyer investigations in RPA paragraph 14 B is via the contingency removal form.

A year ago I would have said no way to any of these. But in the current market environment, if you want to buy a house you may very well find yourself faced with this situation.

Let me describe what it looks like.

You submit an offer 3-5% above the asking price and are then told you are one of 14 and only the top 5 are being countered. The counter asks for your best and final price and one of the terms is that the sale is not contingent on a written appraisal. Wow.

To start with, if you agree to no appraisal and are getting a loan the bank will still require a written appraisal and your loan will be based on a 80% loan to value ratio (LTV). Simple example: sales price is $750,000, 80% LTV you can borrow $600,000.

Now what happens if you waive that appraisal contingency and the property appraises at $725,000? You would either have to make up the shortfall between the appraisal and the purchase amount out of pockets - in addition to the 20% for the loan or basically default and lose you Earnest Money Deposit (EMD). Ouch. Let me add at this point that I have never had a buyer client lose even one dollar (or one penny) of their EMD.

So here's the math on this hypothetical example.

Purchase amount = $750,000. Appraisal = $725,000. Your downpayment now becomes $145,000 instead of the $150,000 based on the new LTV. But, to bridge the difference between the appraisal and sales price you need to bring another $25K to the table. Net out of pocket difference to the buyer is $20K. If you have the money and can spare it, no problem. If not, problem.

Here's some useful guidelines,

If you are putting down 25% or more and have large amounts of cash reserves, waiving the inspection contingency may be an acceptable strategy at least for single family homes. If you have good best-case worst-case scenarios of predictable comps or are putting down 30% or more, it is an option to discuss with you Realtor.

As for waiving the loan contingency. Sure, if you are an "all cash" buyer because you are not getting a loan so not an issue. I have heard that some lenders are now doing TBD approvals meaning that the entire file has been underwritten and as soon as you have a purchase contract, appraisal and title prelim you are good to go. I have not yet evolved that much and done one. Additionally if the property you are buying is a townhouse or condo this strategy is just a total non starter because the lender has to approve the HOA including reserves, etc.

No buyer investigation? That means inspections. Wow. Maybe on new construction or a house that you are thinking of doing a down to the studs remodel or a flip.

Now in normal times and normal circumstances you are going to have to remove these contingencies during the transaction at some point but I would still be extremely cautious if you are asked to remove them before you have time to do your due diligence.

Having just wrote all that, I did have a client today submit a removal of all buyer contingencies along with their offer. But as all cash investor flippers, just what you got to do to get the deal done!