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 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).
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.
Published with Permission
David Strauss | Attorney
**Licensed in NC and GA
540 Lake Center Parkway Ste 204 | Cumming, Georgia | 30040
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