In a competitive contract situation, I see buyers willing to give away many of the traditional protections they enjoy in a normal market environment. If a buyer finds himself in a bidding war, the collective wisdom is to make the contract as high a price as possible with as few contingencies allowed.

Many of the contingencies buyers are willing to let go in a heated contract competition include: home inspection, sale of a current home, and appraisal.

While these new strategies sound good in theory – and many homes have been sold and bought using these strategies – buyers must prepare themselves for a plethora of problems to face once they move into the house without such protections provided for with these requirements.

Home Inspection: Giving away the home inspection, for instance, means the buyer is giving away any ability to discover defects in the problem until he’s moved in. Most buyers say, on the outset, "That’s okay. If I leave the home inspection requirement in the contract, I might not get the house." If that’s your strategy, then okay. Go with it. But be very aware of what you’re giving up and what you may be receiving. If the roof needs replacement – you’re now the one to pay the $5,000 to $15,000 it will take to do that. If there’s rot in the framing, it’s your responsibility; if the toilets leak or don’t flush - you’ve got to take care of it. Leaky basement? Your problem.

The house for which you may have just over-paid may now include defects that will cost even more to fix with money you now don’t have.

Sale of Home: If you have a house to sell before buying a new one — sell it first. Unless you’re paying all cash for your next home without the funds from your current home, then you will face having to qualify for two mortgages to purchase your new home if you cannot sell your current home. (Since you just removed that Sale of Home contingency, your new contract can’t fall out because you haven’t sold your old home) Plus, once you’re up against a deadline to meet with the settling of your new home, you may be forced to accept a much lower sales price than what you would be willing to accept otherwise. Selling your home first is not a bad thing. You’re not going to be left homeless as long as you have friends, family or a smart agent who includes a Home of Choice clause in the contract you have with your buyer. Remember, in a seller’s market, the seller is in control and can dictate to the buyer more of the terms.

Appraisal: I am most amazed at buyers willing to write that the sale of the home is not contingent on an acceptable appraisal. Okay, folks, just hand them your checkbook with your name signed on each check! This strategy is ONLY for people with lots of money. Here’s how it works. Buyer A qualifies for a purchase price of $225,000. He shops for homes in his price range and finds himself in a bidding war on a $200,000 sticker price that winds up at $225,000. He’s excited, and hands over his $5,000 earnest money deposit, which is part of his down payment money. Sounds okay, right? But wait, during the appraisal that MUST be conducted by the bank, but which is not a contingency in the contract, the house only appraises for $205,000. Oops – we’re $20,000 short of the asking price. The bank will only loan $184,500 on the property (90 percent loan to value) and our buyer must come up with the difference – $40,500. You see, he has to come up with that because he struck out the appraisal clause in the contract. It doesn’t matter that the house is only worth $205,000 – he’s agreed to pay $225,000 – no matter if it is actually worth that amount. Can he get out of the contract? Sure, but the seller can keep the buyer’s $5,000 earnest money deposit.

To give up on contingencies is also dangerous for sellers and agents in some cases. In California a buyer sued her agent because she overpaid for a house. Once she moved in, she lost her job and she was angered by what she had done to herself financially – bought an overpriced house. Who better to blame than her agent, right? A seller was also sued by another buyer because of all the defects found in the house once the buyer moved in. Just because a buyer is willing to buy a house without a home inspection, doesn’t mean he can’t sue the seller later if major defects are discovered. Even if the seller wins, he is going to be out thousands of dollars in legal fees or in repair bills.

Be careful about what you’re willing to do without when it comes to buying your home. There are risks involved and the astute buyer will weigh them before making a final decision.

M. Anthony Carr writes about real estate from inside the industry. He has sold, bought, and invested in real estate for more than a decade. In addition, he is a national trainer for real estate professionals in such areas as marketing, sales and fair housing issues. He has been an editorial contributor to various newspapers, trade publications and Web sites across the country.

Published: April 5, 2002

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