Risks of Waiving Contract Contingencies on a Bay Area Home Purchase

As of early 2022, the Bay Area real estate market is one of the most competitive housing markets in the country. Because of this, many home buyers in the area choose to waive their contract contingencies when making a purchase offer.

But what does this mean exactly, and what are the risks of making a “non-contingent” offer on a house in the Bay Area? Here’s what you should know about this tactic.

What Is a Purchase Contract Contingency?

When it comes to real estate and home buying, a “contingency” is a clause that gets added to a purchase offer / contract. The contingency identifies specific conditions that must be met in order for the deal to close. This is what’s known as a “contingent” offer.

If those conditions do not get met, the home buyer could back out of the contract without financial consequences (i.e., losing their deposit). Essentially, these contingencies help protect home buyers from certain risks associated with a purchase.

Here are some common purchase contingencies used by Bay Area home buyers:

• Home inspection: This type of contract contingency allows the home buyer to back out of the deal if the inspection reveals major issues that the buyer is unwilling to accept.
• Financing: A mortgage financing contingency says that if the home buyer is unable to obtain the mortgage financing they need to buy the house, they can back out of the deal.
• Home sale: This contract contingency states that the buyer must sell their current home in order to purchase the new one. If they’re unable to sell their current house, they can back out of the contract for the property they’re trying to purchase.
• Appraisal: Home appraisals are used to determine the current estimated market value of a house. An appraisal contingency, therefore, allows the home buyer to rescind their offer if the appraised value comes in lower than the agreed-upon purchase price. (See: Using appraisal contingencies)
• Title: In real estate terms, the title shows who has the legal right of ownership for a particular property. A title contingency states that a buyer can rescind their offer if the homeowner / seller is unable to transfer the title “free and clear.”

All of these purchase contract contingencies have something in common. They protect the buyer by allowing them to back out of a real estate deal if a certain condition arises — or if a certain requirement is not met. But they have to be written that way, with the appropriate language.

Non-Contingent Offers Common in the Bay Area

The next and obvious question is: Should a home buyer in the San Francisco Bay Area include contingencies within their purchase offers? Or would it be better to make a non-contingent offer on a house in the Bay Area?

This is something that should be considered on a case-by-case basis. Every real estate transaction is different. So it’s not a one-size-fits-all situation, in terms of contract contingencies.

That being said, many home buyers in the Bay Area choose to make “non-contingent” offers in order to compete with other buyers. So let’s talk about that next…

Due to an ongoing shortage of homes for sale, the San Francisco Bay Area real estate market is currently a seller’s market. This means there are more buyers looking for houses than there are properties available. It also means buyers are having to compete fiercely with one another.

Here’s the difference between these scenarios, as it relates to purchase contingencies:

• In a seller’s market, the demand for homes exceeds the supply. This can lead to bidding wars and offers above the asking price. In a competitive market like this, including contract contingencies could work against you. That’s why buyers often make “clean” or non-contingent purchase offers.
• In a buyer’s market, there are plenty of homes for sale and therefore less competition among buyers. Houses take longer to sell, and sellers are typically more willing to accept contingent offers. Contract contingencies tend to be more common in this kind of real estate market.

As of January 2022, the San Francisco Bay Area is still a strong seller’s market. Record-low inventory levels and steady demand from buyers have boosted the competition factor. Because of this, more and more buyers have been making non-contingent offers on a Bay Area home purchase.

Understanding the Risk vs. Reward

Like many things in the real estate world, this all comes down to risk versus reward.

Making a non-contingent offer on a Bay Area home purchase brings certain risks — namely, your earnest money. If you make a deposit on a house and back out of it without having a contingency in place, you could potentially lose your deposit money.

On the other hand, there’s a potential reward as well. In a competitive real estate market like the San Francisco Bay Area, waiving contract contingencies could make the difference between getting or losing the house.

As a home buyer, the best thing you can do is:

• educate yourself further about purchase contract contingencies
• consider the potential risks and rewards of a non-contingent offer
• research current housing market conditions and trends in your area
• work with an experienced real estate agent who knows the market

Disclaimer: This article is educational in nature and intended for a general audience. Portions of it might not apply to your particular situation. We encourage home buyers to seek professional advice from an experienced agent, before making an offer on a house.