Our Guide to Non-Contingent Offers in Real Estate
Let’s Talk About Real Estate Non-Contingent Offers
Let’s start by simplifying this topic. What does non-contingent mean?
“Non-contingent” means something which doesn’t depend on another circumstance.
In real estate, home buyers make non-contingent offers to basically tell the home seller, “I am going to buy this property, regardless of what happens”. This means that the buyer is accepting higher responsibility and a level of commitment to the home seller.
Non-contingent offers have a time and place where they make sense
Why do buyers want to make non-contingent offers?
These offers signal to home sellers that you are committed to completing the sale and are willing to shift more risk to the buyer’s side. Of course, that’s a risk, but it’s attractive to home sellers. They may be willing to prioritize a buyer who makes a non-contingent offer.
Why do sellers prefer non-contingent offers?
To a seller, a non-contingent offer is kind of a win-win. You buyer has essentially locked themselves into a much tighter agreement, where the terms are in your favor, compared to a normal real estate transaction.
In a nutshell, real estate non-contingencies don’t favor the buyer. The one thing that buyers get, is prioritization. A non-contingency offer is quite attractive to sellers.
Contingent Offers vs Non-Contingent Offers
Imagine you were selling your old car. It’s not in perfect shape, but it runs well enough.
You have two buyers who want to take it home.
Buyer 1 will buy it, but their offer is contingent on two things. They want you to show them a clean bill of health from the local auto mechanic. They also want the car to be fully cleaned before they drive it away.
Buyer 2 will buy your vehicle and their offer is non-contingent. They will hand over the cash in return for the keys and ownership papers; it's as simple as that.
It’s basically the same thing in real estate, but the stakes are much higher and the contingencies are more serious.
That being said, new properties carry less risk and so a non-contingent offer might be a practical tactic to buy a home in a competitive market.
Savvy local realtors may decide that sometimes, non-contingent offers make sense, like buying a certain property in a hot market.
Main Kinds of Non-Contingent Offers in Real Estate
In California and Santa Clara real estate, a non-contingent clause is part of a Removal of Contingencies with Offer or a Contingency Removal.
Let’s say that a home buyer falls in love with a home, but there’s a chance they are outbid and lose it to another buyer. This is when some knowledgable realtors might recommend a non-contingent offer, depending on what they know of the property.
Home buyers can waive some or all of the following main contingencies:
Home Investigation/Inspection Contingency
One of the most crucial aspects of buying a property is getting a home inspection. Waiving your right to an investigation with a non-contingent offer is a calculated risk that you undertake with guidance from a real estate professional.
Savvy buyers sometimes proceed with a home inspection, but include in the real estate contract that their decision doesn’t hinge on the results of certain damages, perhaps under $500.
This allows them to get the home inspected for anything dangerous, such as mold. At the same time, the sale is not dependent on the results (within certain terms) so the non-contingent offer is attractive to sellers.
Home inspections are valuable, so you should always get one
If a buyer waives the appraisal contingency, it can expose them to extra costs. Let’s do a simple example to explain this.
A home in San Jose is listed for $1 million. It’s a lovely property and a buyer decides to make an offer of $1 million.
But the story doesn’t end there. The buyer needs a loan to purchase the home, so he heads down to the local lender. When this happens, the lender must send an appraiser to the property. A lender does not want to lend more money than the home is worth, which is why the need to appraise its value.
The appraiser comes back to the lender with shocking news. The home is only worth $800k on the current market.
When this happens in the real world, the buyer can walk away from the deal, thanks to an appraisal contingency. If the buyer chooses to proceed, they must cover the difference between the appraisal and the offer. In our example, that means $200k.
With an appraisal contingency, the buyer can walk away from the deal in this case.
With a non-contingency offer, the buyer must cover the difference, which can expose them to financial risk.
In most real estate transactions, the buyer can walk away from the sale if they do not receive financing in time. This helps shield buyers from being on the hook for massive amounts of money. If the bank or lender refuses to support your loan or mortgage, it’s great to have a contingency plan.
If a buyer makes a non-contingent offer on a home, you can imagine the risks. Most of the time, buyers who make a non-contingent offer have already thought about this possibility. One reason, is they may have a high level of certainty that their loan or mortgage will be approved.
Buyer’s Home Sale Contingency
Some buyers use the proceeds from one home sale to buy their next property. If an offer is contingent on this, it means that the buyer will only proceed if their previous home sells. Buyers can use their profit to cover moving costs, deposits, and other real estate expenses.
If the offer is not contingent on the buyer’s home sale, the buyer is locked in, even if their previous home fails to sell. This can be a relatively small problem, or a serious one, depending on the homebuyer’s situation.
Home buyers sometimes sell one property before moving to another
Does a Non-Contingent Offer Make Sense?
We talked about some of the risks that a non-contingent offer carries, but this is not a one size fits all situation. There are absolutely times when this kind of strategic offer carries less risk and makes the most sense.
There are ways to have non-contingent offers with extra protections too, which you should discuss with a realtor. When you enter the world of real estate contracts and negotiations, it’s best to have experience on your side.
If you’re thinking about making a non-contingent offer, reach one of our realtors for a no-obligation consultation. The internet has answers, but none of them are tailored to your situation. When you’re chatting with a realtor, they will be.
Contact The Jamison Team with an email.