The Fairfield County real estate market has become difficult to navigate. With interest rates remaining elevated and sellers hesitant to enter the market, buyers are struggling to find new properties to purchase. Buyers are doing everything in their power to make their offer seem as attractive as possible to the seller. But how much is too much? As a buyer, do you understand the risk associated with your offer? Below are the two most common contingencies we see buyers waiving in this market and a discussion of the risk of making an offer without these contingencies.

What is a No-Contingency Offer?

A no-contingency offer is a proposal to buy a property without any conditions that must be met before the sale can proceed. Typically, offers on a home include contingencies such as the buyer securing financing or, the home passing an inspection. By forgoing these stipulations, a no-contingency offer is often more attractive to sellers as it reduces the risk of the deal falling through and can expedite the transaction process. This type of offer demonstrates a buyer’s serious commitment and financial readiness to proceed with the transaction. While this can help give buyers a competitive edge, it also involves higher risks. Buyers must be confident in their financial situation and willing to give up the safeguards that inspections and financing contingencies provide.

The Mortgage Contingency

As a buyer, you can make an offer without a mortgage contingency and still obtain financing for your purchase. An offer with no mortgage contingency does not mean that you have to pay cash. However, unless you have sufficient funds to purchase your new home without a mortgage loan, the risk with making an offer with no mortgage contingency is that your mortgage application might not be approved. There are two main reasons that your mortgage may be denied:

1. The bank doesn’t feel that you have strong enough credit or income; or
2. The bank decides the house you are buying won’t support the loan, or, in other words, the house does not appraise high enough.

If your lender declines to lend you the money that you need to close on the purchase and you are therefore unable to close on the purchase as scheduled, you risk losing your deposit (normally 10% of the purchase price). Working closely with your banker or mortgage broker and honestly disclosing all of your assets and your liabilities before you put in an offer can go a long way toward determining how much of a loan your income and assets will support. Note that a “pre-approval” does not mean that the bank has fully vetted your financials, and even with a pre-approval your loan can be turned down. A pre-approval can give you some comfort that your financials support the loan that you are applying for, but a deeper conversation with your lender is prudent if you are considering waiving your mortgage contingency.

One alternative if you are confident with your finances but not sure that the purchase price is supported by the value of the house is to waive the mortgage contingency but request an appraisal contingency. However, it should be noted that in highly competitive markets, even appraisal contingencies are being turned down on properties that receive multiple offers. An appraisal contingency allows a buyer to rescind their offer without penalty if the property’s appraised value is lower than the agreed-upon appraisal price which is typically the sale price. This type of contingency protects the buyer by ensuring they do not overpay for a property based on its current market value and ensures that they will receive the level of financing that they need. This is important to note because lenders typically finance a property up to eighty percent of its appraised value, not the purchase price. If you have an appraisal contingency and the appraisal falls short, the buyer can renegotiate the price with the seller, seek additional financing, or withdraw from the deal entirely.

The Inspection Contingency

There are a number of different approaches that buyers can take regarding inspections. With a full inspection contingency, the buyer can bring up a list of items that need to be repaired and ask the seller to either repair the items prior to closing or provide the buyer with a credit. Some buyers try to signal to sellers that they will not raise minor items by stating that they would like to do an inspection “for informational purposes only” or “for health and safety issues only.”

With both of these types of inspection contingencies buyers are protected if there are major issues with the home such as a leaking oil tank, mold, a roof that is about to fail, etc. but will need to move forward if the inspection reveals only minor issues such as leaking faucets or non-working outlets. Generally, if you are prepared to take on some repair expenses prior to moving into your new home, you can feel sufficiently protected by the “for informational purposes only” or “for health and safety issues only” inspection contingency.

Some buyers have taken things a bit further and have fully waived their inspection contingency in their offer. Unless you are very familiar with building construction, this is an extremely risky offer to make. Houses are staged to be sold. Many issues that will be apparent to a trained building inspector can be missed by a home buyer even if the house appears to be solid and well-maintained. It is important to note that the Residential Property Condition Disclosure Form and seller representations in the contract are not a substitute for doing your own due diligence prior to closing on a purchase. Once you close on your purchase you do not have any recourse to go back to the seller for issues you discover post-closing unless you can prove that the seller intentionally misled you. A court is unlikely to be sympathetic to the buyer that could have discovered the problem in advance but waived their opportunity to do a building inspection.

As real estate attorneys representing buyers, the attorneys at RLG understand buyers need to do all they can to make their offer as attractive as possible in this challenging market. But we do want to be sure that our buyers fully understand the risks of the offer that they are making. On the flip side, as seller’s attorneys, we will continue to advise our sellers that a slightly lower offer with no contingencies is a stronger offer than the offer to pay a higher price but with more contingencies.

Amy S. Zabetakis is one of the founding members of Rucci Law Group, LLC. She practices primarily in the areas of real estate and zoning. Amy can be reached at 203-202-9686 or at [email protected].