I've heard that waiving a contingency is a good way to get an edge over the competition in a seller's market. But how can I weigh the risks against the rewards of doing this? And is it more risky to waive an appraisal or a financing contingency?
In a seller's market where bidding wars are commonplace, many buyers opt to waive contingencies as a strategy for standing out from the competition. Waiving a mortgage contingency—a clause in the contract that allows buyers to get out of a real estate deal if they can't secure financing—means that the buyer will lose their deposit if their financing falls through.
"Waiving a mortgage contingency in a competitive market is almost essential for a buyer to be competitive," says Deanna Kory, a broker with Corcoran. "Buyers who are confident in their financial ability to attain a mortgage often do go ahead and drop the mortgage contingency, because their banker has given them enough assurance that it will not be a problem."
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Appraisal contingencies, meanwhile, protect the buyer in the event that the apartment they're buying is appraised for less than its sales price. Without such a contingency in place, the buyer would have to make up the difference in price themselves if the appraisal falls short, rather than back out of the contract or re-negotiate the sales price.
"In a market that is going up in value, an appraisal contingency can be risky for a seller," Kory says. Buyers willing to waive it, then, will have a leg up on the competition.
But waiving either of these clauses in a contract comes with risks. Calculating those risks requires you to do some legwork.
As for waiving the financing contingency, "only the [buyer] can assess the likelihood that he or she will qualify for financing, but they can attempt to get pre-approved from a loan," says Jeffrey Reich, a partner in the law firm of Schwartz Sladkus Reich Greenberg Atlas. "Obtaining a pre-approval is not an absolute guarantee, but it can help a purchaser assess their likelihood of obtaining a loan, and it may provide an industry contact that can help a purchaser assess the likelihood that they will qualify."
And when it comes to assessing the risks of waiving an appraisal contingency, your best bet is to ask your broker to research sales of comparable units in the neighborhood, or do so yourself. This will give you a sense of how the apartment you're planning to buy might be appraised.
"Appraisers use similar methods to appraise the value of apartments, which lending institutions rely on for approving loans," Reich says. "The answer to the question is one that the letter writer can answer by honestly assessing their credit worthiness and researching the sales prices of similarly situated apartments."
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