If you are buying a home in Los Angeles right now you will know that the market is crazy. You make offer after offer only to be outbid by others, many of whom are paying all cash. So how do you compete?
Well, bottom line it will come down to the amount and cleanliness of the offer, cash or not. If two offers are similar enough and one is all cash, then the all cash offer is going to win out. But, you can beat out the cash offer if yours is high enough or co
ntingency- free enough. Even so, the attractiveness of a cash offer is two things: no loan contingency and no appraisal contingency.
What is a loan contingency?
What is an appraisal contingency?A loan contingency protects the buyer in case they are unable to secure a loan. The standard time period to secure a loan on the contract is 17 days. This often gets extended in today’s tough lending environment. Should, in good faith, the buyer be unsuccessful they can cancel the contract without penalty.
Under normal circumstances a buyer relying on a loan in order to purchase a property will also put in place the appraisal contingency which is also a standard 17 days period. The lender is only going to loan money on the value of the property as assessed by the lender’s appraiser. If the property appraises for less than the amount the buyer offered the buyer basically has three options:
- Negotiate with the seller to lower the price
- If the seller refuses, then they can cancel the contract
- Or, pay the difference
An example of No. 3 if the accepted offer on a property was $600,000 and the appraisal finds the value at $575,000, the buyer will have to come up with an extra $25,000 in order to complete the purchase. This will be in addition to the do
wnpayment. If 20% is being put down the buyer will need to pay $140,000 out of pocket. The downpayment is obviously lowered by $5,000, but they will take a hit on the difference between the appraised value and the offered amount.
In this current market, buyers are often waiving the appraisal contingency in order to stay competitive. This is a risky but necessary move if the buyer really wants a particular home. It is also being accompanied by other contingencies being waived or modified, such as:
- Termite inspection and remediation
- Home warranty
- Lowering the inspection period to 5 or 7 days
- In some cases if a previous recent inspection report has been received, waiving the buyer’s own inspection
None of this, of course, is recommended, but if the buyer is fully informed of the consequences and still chooses to, taking the above measures may help mitigate the effects of an all cash offer, especially if the price offered is attractive enough.
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