By David Hunt, Flyhomes Client Advisor Lead
While we’re all doing our best to stay healthy at home, millions of us are waiting for nature to welcome us back to the great wonders that can only be found in the mountains, rivers, oceans, and canyons.
At first glance, it may seem like homebuying and hiking couldn’t be more dissimilar. From my perspective, the journey to basecamp isn’t so different from the journey to your new front door. In both cases, you have to know where you’re going and develop a plan to get there.
On any hike, you’ll want the basics: boots, water, a snack, hiking poles and, in some cases … bear spray! The path may be fraught, so it’s best to come prepared.
There are also basics to bring into a home offer. I’ll outline some tips and tools to make sure you’re fully prepared for your journey home, focusing on contingencies you might want to pack into your offer.
Earnest money (EM) is a portion of your down payment that acts as skin in the game. Earnest money goes to the seller if a buyer backs out of the transaction (without contingency protection).
You can think of earnest money like the investment you have in camping/backpacking equipment. The better the gear that you are able to bring along, the better your journey. The more earnest money you are able to bring into the offer, the stronger the offer.
Pre-underwriting is the most extensive pre-qualification a buyer can get, a tool to help you be sure of your budget and to give the seller confidence that you’re able to buy the home.
It’s a guarantee from a lender that they will provide a loan to that buyer at or below a specific dollar amount for the next 60-90 days. In order to guarantee the loan, your finances are thoroughly checked and reviewed manually by an underwriter.
The only reason this loan amount should change is if something big happens with a buyer’s financial situation, like loss of income, or another major purchase, like a car or boat.
Contingencies are designated periods of time where earnest money can be refunded, even if you back out of the sale. Contingencies can offer great protection, but just because you have all the coolest hiking gadgets, that doesn’t mean you want to bring all of them, every time.
I’ve outlined the most common contingencies.
An inspection contingency is a life raft out of any situation. The timeframe for this contingency should be kept as short as possible (1-3 days) and you should only use it in the riskiest situations.That’s because its strength for the buyer is also a weakness in the eyes of the sellers.
An inspection contingency allows the buyer to back out without giving a reason, and makes sellers very cautious since buyers could potentially just get cold feet and walk away from the sale during this time.
If a buyer tours and pre-inspects a home, they should know whether they’re comfortable buying that home, without the need to escape at any time.
A finance contingency is bear spray for when something goes wrong with a lender. It can come in handy at any point in the closing period (30 day average). If a lender happens to make a mistake in pre-qualifying you for a loan and can’t deliver the full value needed to complete the transaction, a finance contingency allows you to back out and not lose your earnest money.
If you’re on a well trafficked trail where bears are scarce, there probably isn’t much need for bear spray. If you’re backpacking through Alaska, however, and are aware of the fact that in spite of their hefty gait, grizzly bears can reach a top speed of up to 35 miles an hour, it’s probably a good idea to bring some spray, just in case.
Similarly, a finance contingency is only necessary in special circumstances. As long as you get fully pre-underwritten, and don’t already own a home, this contingency is likely excessive. It would be like bringing bear spray to a hike through a public park. If you know the trail and are 99% sure you won’t see any bears, it just doesn’t make a whole lot of sense.
An appraisal contingency is like a safety cord to repel down a steep cliff. Similar to the previous contingencies, this gear is relevant only to certain types of offer terrain. If a home is overpriced by the seller, or if it becomes highly competitive, buyers might be willing to pay more than a home is worth. Lenders almost always order an appraisal to make sure you don’t overpay for the home.
If a buyer agrees to pay $900,000 for a home that might have a fair market value closer to $825,000, a lender might only be willing to pay up to $850,000. The lender will ask the buyer to cover the rest.
A buyer can use their safety line to reach out to other lenders who may be able to cover the full offer price, or they may use it to get out of the tough situation altogether within the contingency period (15-30 days).
If the appraisal is low and no lender is willing to cover the full amount of the offer price, a buyer with an appraisal contingency can back out of the offer and keep their earnest money.
A resale contingency is a buyer’s set of crampons to navigate the icy peaks of condos with homeowners associations (HOA). All HOAs have their own board and rules, which can be very slippery to navigate. Some HOAs provide their documents before offers are submitted, which makes the ice more like slush that can be pretty easy to navigate. Other HOAs are as slick as your local skating rink with a 30% incline.
Document packages can be 300-400 pages long and need to be checked thoroughly to ensure buyers are comfortable with the covenants, conditions and restrictions (CCRs). Resale contingencies give buyers 5 days from receipt of these documents to review all HOA documents and decide if they are still comfortable moving forward with the purchase.
A force majeure is an addendum that serves like hiking poles on journeys with unprecedented incline. A force majeure is not a true contingency, but it is being included in most offers during the coronavirus pandemic. The force majeure addendum ensures that if an event outside of the control of the buyer or seller causes a delay that prevents the transaction from closing, the earnest money is returned to the buyer and there is no penalty.
Imagine the seller being stranded on a deserted island. They want nothing more than to get off of the island, but can only pick one person to help them. Once an offer is accepted, they’re legally obligated to see that contract through and can’t accept any other offer throughout the closing process, which can take 30+ days.
Sellers have to decide if they want a shady looking pirate offering stacks of gold who doesn’t know where he might dock next … or a seasoned sailor with a hot meal prepared and a clear route mapped out.
The pirate is a buyer offering a high price but protecting it with some strong contingencies. The sailor is a buyer offering a competitive price, who has done their due diligence to feel comfortable waiving contingencies.
Sometimes sellers take the gold, but most buyers should prepare themselves to be more like the sailor. It doesn’t make a whole lot of sense to entice a seller with gold, when safe passage ashore is just as important.
These concepts are a helpful introduction to offer dynamics that will make your homebuying experience more enjoyable and successful. When you find a home worth the venture, be sure to consider carefully which contingencies and addenda will help ensure safe passage, but won’t weigh you down so much that you are unable to complete the journey.
Ready to hit the homebuying trail?