11/21/2021
"A Buyers Risk Pyramid"
In this highly competitive market, buyers are removing language in the Purchase and Sale Agreement (PSA) and some of their contingencies to entice sellers to accept their Offer to Purchase. The removal of any of the language protections and contingencies creates risks to the buyer of losing the money they pledge to the seller (Earnest Money) prior to the transfer of title to the buyer (Closing) on their purchase and, not purchasing the home. Below I discuss those items from least risky to most risky to the buyer.
a.) Paragraph X of the PSA – Paragraph X allows 10 days for the buyer to review the information provided by the seller and listing agent to confirm there are no items that are materially incorrect like; year built, square footage, school district, construction material, sewer/septic connection, energy source, etc.
b.) Title Contingency – The buyer and his/her agent should confirm with the Title Officer any condition of the property that may impact it’s use like; encumbrances, easements, restrictions, post-closing assessments, etc. prior to submitting an Offer to Purchase. This review is very easy and only takes a couple of minutes.
c.) Seller Disclosure Statement – The State requires each seller to provide a detailed description of various aspects of the home including; condition of seller’s title, condition of improvements, environmental issues, water source, quality of sewer/septic system, etc. Any material information that is not disclosed allows the buyer to terminate the transaction up until closing and preserve their Earnest Money. It is in the seller’s best interest to honestly complete this disclosure to avoid potential litigation.
d.) Resale Certificate – If the seller is part of a condominium or, the living unit is in a condominium building, the seller is required by the State to provide information to the buyer on its’ financial condition, legal issues, upcoming capital improvements costs, etc. When a buyer waives their ability to review the Resale Certificate and supporting documents there may be additional risks and costs to the buyer following Closing. Prior to submitting an Offer to Purchase the buyer should review the Resale Certificate and supporting documentation to fully understand the condition of the property, homeowner’s association, rules and regulations, etc.
e.) Financing Contingency – When submitting a PSA a buyer states they are capable of purchasing the property at it’s agreed price. If the buyer is relying on securing financing from a third party, the buyer must disclose this to the seller. If the buyer does not include a Financing Contingency with their PSA, and the buyer is relying on this financing, the buyer will lose their Earnest Money if they cannot Close on the purchase. The financing contingency protects a buyer from anything that may get in the way of a bank being able to provide them with a loan. This could range from the loss of a job to a low appraisal. It’s very risky for a buyer to waive their financing contingency. A buyer should use a high-quality local lender and get fully underwritten prior to submitting an Offer to Purchase.
f.) Appraisal Contingency – Buyers have the ability to waive their Financing Contingency and retain their ability to have an inspection and appraisal by a potential lender to determine the loan amount a lender will lend to the buyer. The loan amount allows the buyer to determine if there will be an additional down payment amount the buyer will be required to bring to Closing. A buyer should have additional cash on hand if a larger down payment is required or, confirm they have the ability for finance their purchase with a higher loan-to-value ratio with their lender.
g.) Early Release of Earnest Money – To entice a seller to accept their Offer to Purchase, buyers are releasing their Earnest Money to the seller prior to Closing. In some cases they’re releasing the Earnest Money upon mutual acceptance, X days after mutual acceptance, or upon waiver of their Inspection Contingency. This is risky to the buyer because if, for any reason, the transaction fails to Close, the buyer has little hope of the return of their Earnest Money back from the seller.
h.) Inspection Contingency – Buyers are required to fully inspect the home, or waive that right, for defects that may allow them to terminate the transaction and retain their Earnest Money. Buyers who do not perform an inspection, or accept a seller provided inspection, are putting themselves at great risk for potential unexpected problems in the future. The costs of material defects may far exceed their Earnest Money Deposit. Buyers should always include an Inspection Contingency, or perform a pre-inspection with their own general inspector, prior to submitting an Offer to Purchase.
