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Real Estate Tips for Buyers - Winning in Multiple Offer Situations - Options and Their Risks

alpharetta real estate buying real estate Apr 21, 2022

Multiple Offers Disclosure

by David Strauss, Attorney, O'Kelley and Sorohan

The current market for residential real estate is a decidedly seller’s market. A record low inventory of homes for sale, coupled with an increased demand for homes to purchase has led to an incredibly competitive marketplace. As a result, many Buyers are making offers to purchase homes that are well above asking price, allow the Seller to have temporary occupancy of the home after closing, have a large amount of earnest money, and waive contract contingencies in favor of the buyer. Such an offer may win the deal but it does not come without significantly more risk than normal for a Buyer.

Below are some common tactics Buyers are using to be competitive in today’s market. Buyers should understand what it means to make such an offer and the risk the expose themselves to in doing so.

WAIVING DUE DILIGENCE

What is Due Diligence?

Due diligence is a time where the Buyer may unilaterally terminate the contract for any reason whatsoever. The purpose of Due Diligence is to give a Buyer time to determine if they really want to buy the property. Most Buyers make an offer after doing a brief walk-through of a home. The Due Diligence period allows a Buyer to have a home inspection, termite/wood destroying organism inspection, septic/well inspection, radon testing, mold testing and to decide based on the results of those tests, whether they are willing to purchase the home in the condition it is in (“as-is” condition) or if they are only willing to purchase the home if the Seller will address items that are revealed through those inspections. If the Buyer is only willing to purchase the home if the Seller addresses items of concern, and the Seller is unwilling to do so, the Due Diligence Period allows the Buyer to terminate the contract without penalty and take their earnest money back.

Waiving due diligence does not prevent a buyer from having the home inspected.
- However, if the inspections reveal issues with the home the Buyer is unwilling to accept, the Buyer most still purchase the home, or they will lose their earnest money.
Georgia is a “Buyer Beware” State.
Georgia law requires a Seller only to disclose “latent defects” of which the Seller has actual knowledge. This means that a Seller has no obligation to tell the Buyer about problems with the property. If the Seller provides a property disclosure, then the Seller must accurately disclose the condition of the property, but this disclosure is not a warranty and a Buyer who later finds a problem may be without recourse.
Purchasing a property without a due diligence period means that the home is being purchased in the condition it is in. The Buyer must purchase the home regardless of what an inspection reveals or they will lose their earnest money.

WAIVING A FINANCING CONTINGENCY

What is a Financing Contingency?

Most Buyers need to obtain a mortgage to purchase a home. Buyers who are actively making offers on a home are presumed to have talked with a Lender to determine if they are eligible to obtain a loan. However, because the determination about whether a Buyer actually qualifies or not, generally cannot be made until after a Buyer is under contract, the Financing Contingency is a period where the Buyer can terminate the contract and get their earnest money back, if a Lender determines the Borrower cannot actually qualify for a loan (provided the reason for denial meets certain criteria).

Not including a Financing Contingency means that if a Buyer does not qualify for the loan, they will lose their Earnest Money.
- Even if the reason for the denial has nothing to do with a change in the Buyer’s financial status, for example if underwriting guidelines change and a Borrower no longer qualifies, they will still lose their Earnest Money.
A preapproval or prequalification are not the same thing as actually being approved for a loan.
- Being preapproved or prequalified are no guaranty that the Buyer will actually qualify for the loan. Preapprovals and prequalifications are based on a limited amount of financial information. A Buyer who waives the Financing Contingency on the basis of a preapproval or prequalification runs the risk that they will not ultimately qualify for the loan and will lose their Earnest Money.

WAIVING AN APPRAISAL CONTINGENCY

What is an Appraisal?

As mentioned above, most Buyers will need a mortgage to purchase a property. A Buyer will pay some portion of the purchase price with their own funds, and then will borrow the remaining amount in the form of a mortgage. An appraisal is where the Lender decides how much the home is worth, which then determines the maximum amount of money they will lend to the Buyer.

For example, a Buyer purchasing a $100,000 home may want to pay $20,000 of the purchase price and then take a mortgage for the remaining $80,000 of purchase price (an 80% loan). For the Buyer to obtain an $80,000 loan, the lender must first make sure that the property is worth $100,000. If, the lender determined that the home was worth less, then the Buyer would only be able to obtain 80% of whatever the value the lender assigns. So if the home appraised for only $90,000 then with an 80% loan, the Buyer would only be able to borrow $72,000. This means the Buyer would have to come up with additional $8,000 in cash to purchase the property (The buyer was putting down $20,000, their loan would be $72,000, which equals only $92,000 of the $100,000 purchase price).

What is an Appraisal Contingency?

An Appraisal Contingency is a period during the contract where if the lender determines the sale price is higher than the actual value of the home, then the Buyer can ask the Seller to reduce the sale price, and if the Seller does not agree, then the Buyer can terminate the contract and get their Earnest Money back.

Waiving an Appraisal Contingency DOES NOT mean there is no appraisal.
- The lender will still perform an appraisal in most cases. The waiver of the contingency just means if the lender finds the value of the property to be less than the sale price, the Buyer will have to come up with the difference between what the lender is willing to loan them and what the Buyer has agreed to pay the Seller. If the Buyer cannot come up with the difference, and the Seller will not reduce the sale price, the Buyer will lose their Earnest Money.
Even where the Buyer has not agreed to pay more than the list price, the waiver of an Appraisal Contingency still puts a Buyer at risk of losing their Earnest Money.
- Even where a Buyer does not agree to pay more than the list price, waiving an appraisal contingency still puts the Buyer at risk of losing their Earnest Money if the property does not appraise for the sale price. Agreeing to pay list price is no guaranty that the property will appraise. Whatever the agreed sale price, if the property doesn’t appraise, the Buyer will still be obligated to purchase the property at the agreed upon price or they will lose their Earnest Money.
Agreeing to pay over the list price and waiving the Appraisal Contingency significantly increases the odds that the Buyer may lose their Earnest Money.
- The increased competition for homes has in some cases caused bidding wars where the final sale price is much greater than the list price. If there are no comparable sales to support the contract sale price, this significantly increases the odds the property will not appraise for the contract sale price.

Published with Permission

Real Estate Tips for Buyers - Winning in Multiple Offer Situations - Options and Their Risks

Multiple Offers Disclosure

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