I thought the insanity was just about the prices!
July 31, 2015 10:00 AM   Subscribe

In short: almost everyone we talk to about buying a house in the East Bay (California) states plainly that we will need to waive the appraisal contingency to ever have an offer accepted. This seems utterly insane. Am I missing something?

Things I already know (or think I know):
-The basics of the contingency. I get that without one we (the buyer) can be responsible for coughing up a chunk of cash to bridge the gap between the appraised value and the sale price.
-The reality of this market. Yes, I get that things are extremely competitive and prices are very high. I understand it's a "sellers' market."
-Self-interests. I get that everyone else involved in our house hunt, from the realtors to the bank people to the sellers and the sellers' inspectors, only care about making money after we close a deal.

What I don't get is: is there truly an endless supply of other people willing to take this massive (could realistically be $30k-$40k or worse) gamble, and/or a complete lack of sellers who don't need cash NOW! NOW! NOW? Is this level of risk just something that SF-area house buyers have to accept? Or am I wrong, and should we just learn to stop worrying and love the contingency-free offer.

Background: we are first-time buyers, well-qualified and stuff, plan to put 20% down, and we currently rent in the neighborhood in which we're looking to buy. We have made a single offer (we've been looking about a month), which we were told was competitive in price but lost out because of the appraisal and loan contingencies (already waiving inspection contingency and probably comfortable waiving loan contingency next time). We really want our own house but continuing to rent is an acceptable outcome is every other course looks really dumb.
posted by Ignatius J. Reilly to Work & Money (17 answers total) 4 users marked this as a favorite
We bought a house on the peninsula last year. This contingency was BY FAR the scariest for me to waive as the other two we could mitigate (reading disclosures, working super closely with a great mortgage guy), but we did it, got the house, didn't have issues. It does suck, but in my experience you are not competitive with it. Our agent was reassuring, but at the end of the day it was our money on the line - that said, I believed he knew what he was talking about and had strong, very local experience to back up what he said.
posted by handful of rain at 10:12 AM on July 31, 2015 [1 favorite]

We recently bought a place in the peninsula and it took us four bids before we realized that yes, we needed to drop the contingencies. The thing about the contingency is that all else being equal, of course a seller is going to pick that offer over another offer, even though, by itself, it is not worth anything. In fact, we saw a case where someone bid lower but without contingency, and the seller offered it to that buyer if they could come up to the higher number that someone with a contingent bid offered. I don't think they offered the other way around (offering it to the higher bidder if they dropped contingency), but I'm not sure.

I don't think the east bay is quite as fiery-hot as the peninsula, so you might get lucky and just be competing against one or two other bidders at a time. If you want to get the best possible deal and don't mind it taking a long time, then you could keep low-bidding, or with contingency, and hope that you get lucky. But you'd basically be handicapping yourself a little bit each time.

The other thing to keep in mind is that you can get multiple appraisals from different lenders after you win a bid. It was actually a good thing I did this, because one of the two appraisers put us 5% under, even though 3 bids had come at the same price as ours. So luckily, we were able to go with the bank/appraiser that valued it at 100%.
posted by thewumpusisdead at 10:19 AM on July 31, 2015 [1 favorite]

We managed to get a house in Seattle (similarly competitive market) without waiving the appraisal contingency, but got beat out on 5 previous offers, usually by people who had done so. We always waived the inspection contingency, usually bringing in our own inspector for a pre-inspection, which got pretty pricey having to do it on every offer, especially since you usually needed to get one with a less-than-5-day turnaround, and inspectors were usually booked up 3 weeks out. The one we got, we didn't even pre-inspect, because the sellers provided their own inspection report, our realtor knew the inspector who did it and said they were trustworthy, and the report wasn't too glowing so we decided to trust it. We found waiving the appraisal contingency to be pretty scary, especially since the people who were doing so were usually putting 30K on the table in earnest money, and we just couldn't afford to lose that much if the home failed to appraise. Appraisers were being pretty liberal here, so offers 25% over list were pretty typical, but every seller was afraid of being the "first one" to have their buyer's offer not appraise. But in the end we made that a deal-breaker and refused to waive it. It just meant we had to get strategic in other ways and be prepared to keep trying for a longer period of time (as well as changing to a less competitive neighborhood).

Basically, my advice would be to make sure that your realtor really has their ear to the ground and is strongly familiar with what the dominant bidding strategies are in your region, aware of your funding and your comfort level limits. Know your own limits and don't back down under pressure. Change your agent if you feel like you can't count on your current one to have your back in this regard.
posted by matildaben at 10:20 AM on July 31, 2015 [1 favorite]

My wife and I bought in the city three years ago or so. We were randomly lucky not to be bidding against anyone but we got a few of the same pressures you're discussing - we did manage to put a bunch of contingencies in there and still got the place.

That said I would not necessarily push for all of them. The appraisal in particular is a weird one because the basic deal is that you're planning to borrow $X for the house and your lender wants to make sure the house is actually worth at least $X - you know, in case they have to repossess it - so you need to get it appraised to make sure it is worth that much. The thing is that is all they care about and in particular they don't care what happens to your equity. So if you are putting 20% down the appraisal can be up to 20% below the anticipated sale price and the bank should still, in theory, be fine with the sale. In point of fact our appraisal came in about 10% below the contract price and we just shrugged it off; we knew there was very little chance the next sale would be that low given the market conditions in SF unless the roof literally caved in.

Which is a long way of saying you'd probably be fine waiving the appraisal contingency because unless you are paying WAY above what it is objectively worth in terms of location and structural integrity, your appraisal ought to come in high enough that you can still get financing. 20% is a big margin.

Which brings me to the loan contingency. Which is what might really get you into trouble. I think the short answer to your question is yes, there are so many other people willing and able to take the $50K+ gamble that they might well crowd you out. And that is a shame because there is no way I would waive the loan contingency because it obligates you to come up with the entire purchase amount even if no bank will lend to you! To me that is crazy talk, just to convince you I am not some sort of carefree, contingency-waivin' guy.

So, yeah, some contingencies are more important than others, but unfortunately yes, there will probably be somebody else willing to take the risk if you are not. It's tough right now.
posted by Joey Buttafoucault at 10:22 AM on July 31, 2015

There does seem to be an endless supply of people who are willing to do this (in addition to paying all cash, bidding way above asking, etc). This market is brutal and filled with lots of investors/speculators. Having a pedigree that would look A+ in other markets isn't enough in lots of parts of the Bay Area and so you have to assume more risk to even get through the door.
posted by quince at 10:25 AM on July 31, 2015 [2 favorites]

On reviewing matildaben's comment, I should specify that my take on the appraisal contingency does assume you are doing a bit of diligence into comps yourself, even just checking Zillow and Redfin and whatever for recent sales in the neighborhood, and that your offer is in line with those comps rather than being, for instance, 25% over listing.

If you are going to bid well above the comps, then yes you should be ready for a low appraisal and should really think twice before waiving that contingency.
posted by Joey Buttafoucault at 10:26 AM on July 31, 2015

Just wanted to say, my experience through my lender was the opposite of what Joey Buttafoucault said:

if you are putting 20% down the appraisal can be up to 20% below the anticipated sale price and the bank should still, in theory, be fine with the sale.

In my case with my lender it had to appraise for what we were offering for them to write the loan. Maybe different lenders/different times, especially with a lot of the rules tightening after all the economic stuff of the past years.
posted by handful of rain at 10:26 AM on July 31, 2015 [1 favorite]

The lenders with whom we have spoken have given us terms in with handful of rain's understanding of the contingency.
posted by Ignatius J. Reilly at 10:36 AM on July 31, 2015

Huh. Well then, I stand corrected. I am a little surprised they won't even give you a few percent worth of wiggle room, but if not, there you go.
posted by Joey Buttafoucault at 10:46 AM on July 31, 2015 [1 favorite]

The same thing happens here in Toronto. It freaks me out when I see people do it but a lot of home inspectors don't do a proper job anyway.
posted by any portmanteau in a storm at 10:56 AM on July 31, 2015

Our realtor's advice was, essentially, the fewer the contingencies the better. He recommended we tour everything on Thursday or Friday right after it was listed, to give us a chance to pre-inspect over the weekend and submit an offer without inspection contingency by the deadline (because there was almost always a deadline, at least that first weekend). I think we did include an inspection contingency in the end, because our offer came on such a tight turnaround that we didn't have time for it. And we had to scratch the appraisal contingency, but in our case that was OK because the FHA appraisal that had already been done could transfer to us.

Our whole process was … unusual. And very, very lucky. We toured the house on Memorial Day (of that year) and learned that it had been listed in April and under contract, but then hadn't sold. The sellers listed it again Thursday with an offer deadline of Tuesday (after Memorial Day) and due to failures at our credit union we had no chance of making an offer by deadline. But our realtor contacted theirs to say we were interested if they didn't accept an offer, and sure enough: they got one, which they rejected because it included a sale contingency on the buyers' home. So between Tuesday evening and Thursday night we had a mad scramble to get a new lender, write an offer, and cross our fingers, and meanwhile they scheduled another open house. And then Friday they accepted our offer and canceled the open house. At our inspection we found out that the original buyers had literally failed to show up at closing because their lender didn't get the loan done in time. They made a second chance offer after we were under contract and the sellers didn't want to have anything to do with them. So, it's not just having the best offer, it's having the best offer at the right time. We got the first (and only) house we made an offer on.
posted by fedward at 11:12 AM on July 31, 2015

The same thing is happening in Seattle. Something to ask your lender that might help with taking this scary risk: how many appraisals have they seen come in low this year? Our lender has had a high volume year and has only seen one. It's in your lender's interest for the appraisal to come in at value too, so ask how confident they are in the appraisers they hire. Are the appraisers local and familiar with the market?

If you do waive this contingency, make sure your agent or the seller's agent or both are present at the time of appraisal and bring their own comps and the stack of competing offers. Our agent told us the appraisal isn't just about what other similar homes have sold for or what the house seems like it's "worth" but also about what the market will bear, which is where the other offers come in. (I mean, seriously, none of the places in SF or Seattle seem like they're "worth" what any of us are paying for them, but that's how it is right now.)

The whole thing is completely bonkers and scary but yeah, you're probably gonna have to waive that contingency or be willing to wait a whole lot longer and make a bunch more offers that fail like matildaben says.

I think to win in a market like this, you gotta be ALL IN. Like, non-refundable earnest money, we're not walking away from this deal no matter what sort of mindset. So if that appraisal does come in 30k low? Well, you gotta have that cash in the bank and I guess the renovations won't be happening this year.... But you'll have a house. That was the mindset we had for our last offer and we won. It was scary as hell but we won.
posted by purple_bird at 11:35 AM on July 31, 2015 [1 favorite]

I really like everything purple_bird said! I agree, one thing we kept in mind was that everyone wants the deal to close - and if all buyers have to drop the contingency then you'd hear about it a lot more if deals were coming in below-ask due to a missed appraisal. No, this doesn't make it any less frustrating or scary, but we kind of just bit the bullet and trusted it would work out.

When the appraiser came through both we and our agent were present. The agent had worked with this person before and seemed chummy. She asked some questions about properties in the area and he kind of hand waived, yeah yeah it's all good. In the final document I think she stated some of the info for the basis of her conclusions came from him. It does seem super sketchy, but if the point is just to make everyone at the bank feel better then I guess it worked.
posted by handful of rain at 11:43 AM on July 31, 2015

Dropping contingencies scares me, and people do it because buyers exist who do things like pay almost $600K over asking price. That happened in our neighborhood this year. People with a lot of liquidity don't have to worry about a shoddy roof or foundation, they just drop the money to deal with it after they buy (since a lot of places bought at these prices end up gutted and rebuilt internally).

We bought in SF a couple years ago. We found a place with complicated TIC financing that was in sorta haphazard shape, so there was no way we would have dropped contingencies (and the seller wasn't a demon, it turned out, so we didn't have to). We did lose out on two offers we'd made previously because of the market games people are playing now, but we can say, in retrospect, good riddance.

My partner is a civil and structural engineer, and he's gone along with friends on house hunts to help them spot red flags, knowing that contingencies are an issue. Do you have someone handy who can help do that sort of thing for you? It's not a bad idea. We've been in a couple of these places when my partner's been like, oh hey friend, we should leave this place now because you are not buying it under any circumstances.

Good luck, much persistence, and stay sane! It's crazy right now but there are still amazing, surprising opportunities that pop up.
posted by late afternoon dreaming hotel at 12:30 PM on July 31, 2015

People are dropping contingencies in Seattle in order to compete with all cash buyers. Every contingency you drop makes your offer more like cash, i.e. less complicated. We lost out on one house that went for something like 250k over asking, all cash. I'm pretty sure we'd waived all contingencies on that one too. And that was from sellers for whom we were told it was a "highly emotional and personal" sale. (I guess the emotion was "money"?)

Also, if your lender is not responsive to questions like the ones I posed above, find a new lender. In super competitive markets like ours, having a lender who is local, highly communicative and known for moving fast will give you a competitive edge. We were told the local credit unions, while good as banks, were terrible as lenders. Everyone we encountered and our own limited experience confirmed this.

You won't ever love the no contingencies offer, but in my experience that's probably the only way you're going to get a house. Unless it's one of those rare, weird houses that's sat on the market for 2 weeks or more. In that case, you can probably put in a much more traditional offer. Hopefully you have a real estate agent you can trust to help you make these judgments.
posted by purple_bird at 3:00 PM on July 31, 2015

The appraisal contingency was the one we would not drop when we bought our house in Oakland two years ago. It just seemed foolhardy. Our sellers took our offer because it was clean, had a short closing: we waived the inspection and loan contingencies because we did an inspection and our loan was underwritten. Appraisals are another thing though, especially in Oakland where housing comps can vary dramatically and non-local lenders have a prejudice against the name "Oakland".

If appraisals are relatively straightforward in the town you want to buy in, maybe forgo the contingency- but many sellers will choose the higher offer even in spite of complications (we lost a house to people who offered high, and ultimately didn't get the appraised value and negotiated for less, grrr....). It just depends on the seller.
posted by oneirodynia at 8:14 PM on July 31, 2015

We didn't drop any of our contingencies, but instead had a reduced clock - 3 days for house inspection, 5 days for appraisal, etc. Our agent worked this out with the mortgage company in advance and hustled like crazy for us. It was a bit of a mess (you can read my history of posts to see why) and very anxiety provoking, but we got the house in the end. This was my second property that I've owned, the first time (as an extremely prudent New Englander) I would have never ever ever done what I did this time. This time (as a free wheeling Californian desperate for a rat-free house) I was willing to take some big risks.

Incidentally, if you are looking for an awesome buyer agent who will walk you through this, not put undue pressure on and hustle like crazy to make everything happen on time, send me a MeMail - our agent was phenomenal.
posted by Toddles at 10:51 PM on August 1, 2015

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