Ways To Back Out Of An Offer

Christian: [0:03] Welcome to another episode of the Awesome in Seattle podcast. This is your host, Christian Nossum, of the Awesome Nossum Group at Wilson Realty Exchange, Inc, and we are a group of Seattle area real estate agents We have been doing this for a long time now. I am here with my awesome co-host, the lovely Joanna Beecher.

Joanna: [0:23] Hello.

Christian: [0:24] Hello. She is also an, an agent here on the Awesome Nossum Group. So we are both Seattle area real estate agents. We work in the Seattle metro, greater Seattle metro area, kind of all over the place. And I say all this because we do know what we're talking about when it comes to today's episode, and that is contingencies. We're really diving into a topic that's crucial for both buyers and sellers to understand in this world of real estate, because contingencies allow a buyer to back out of a real estate contract with no penalties. Now, obviously we don't really want people to back out of contracts, and generally our clients don't, but it helps buyers know what their options are when they understand what the contingencies are so that they can feel more comfortable making an offer. This also helps sellers know when the deal has moved into the category of being a sure thing, quote-unquote, because the contingencies are no longer in place. So let's get into it.

Joanna: [1:26] That's right. You know, real estate contracts are binding agreements, Christian.

Christian: [1:30] Mm-hmm.

Joanna: [1:31] But they do often include contingencies, conditions that must be met for the transaction to go through. So if these conditions aren't met, you might have an out.

Christian: [1:42] Yep. Well, let's start with the most common, the most popular, and the one contingency that pretty much everyone has heard of when thinking of buying a house, the inspection contingency. Now, the inspection contingency allows the buyer to have the property professionally inspected within a specific time period. Usually this, in the Seattle area, if you're able to get an inspection contingency included in your offer, usually this time period is around five to seven days. In Washington, if the contracts are five days or fewer, it does not include weekends and holidays. But if it's six days or more, it does include weekends and holidays. So you can actually have a five-day contingency that lasts for seven or eight days if it's a three-day weekend in there-

Joanna: [2:35] Yep … Speaker: for, for a national holiday. So it's fun to have an agent that understands that and can walk you through that timeframe, because that can get a little confusing. Now, back to- Yeah the inspection contingency. You technically do not have to even have an inspector out to the house during this timeframe. You could theoretically use this inspection contingency as a get out of jail free card with your offer. So I have, you know, seen clients that made an offer, like, a day or two after it comes on the market- With an inspection contingency, and this allowed them to tie up the property, and then they make their decision on if they actually wanna move forward with buying it. And, and it's an interesting strategy. It's not really happening very often anymore because the market's been so strong for the last few years, where the sellers are the ones that are holding all the cards in the negotiation. Yep. But, you know, back in 2008, '09, '10, '11, when the market was much more buyer-favored, this is what people would do. You know, you would make an offer, you'd tie it up, and you would use that timeframe to really do all your due diligence, including getting an inspector out there. But technically, you can back out during your inspe- inspection timeframe for any reason whatsoever. You could literally just change your mind and use that to back out. You don't have to show anything. You don't have to prove that something was wrong. You can just back out. Now, this is important for all buyers and sellers to understand because just because a property came back on the market after being pending inspection, which is what it looks like it's, it says online, even if it comes back, that doesn't mean that something was necessarily wrong. So keep that in mind. If there are issues found because you did get an inspection done and, you know, you need to get them fixed or you want to get a credit from the seller so that you can choose to fix them after the closing date, that's what you can do. This is the beauty of the inspection contingency. It really protects you, the buyer, from finding unexpected repair costs that could arise after the purchase. And this is, you know, a crucial step in the buying process Yep. And one of the reasons for several of the things that you just said, sellers don't like to see that. So in the competitive market, that's one of the first things that will, that could count your offer out as- Mm-hmm being competitive if there is an inspection involved in that, so.

Christian: [5:08] Yep. Very, very true. And that, we'll go back to something that we say in every one of our free beers and home buying class, plug, shameless plug, is that you always want to see an inspection report before you buy a house, whether the seller gives it to you as a seller-procured inspection, or you hire an inspector before you even make an offer, and that's called a pre-inspection, in order to determine what's going on with the house. And you can also get a sewer scopes. It's a smart way to

Joanna: [5:35] go.

Christian: [5:35] Yep.

Joanna: [5:35] Yep.

Christian: [5:36] Yep. And you can also get a sewer scope as well to make sure there's no issues with the sewer line. All right, so if you wanna learn more about inspections and the difference between a pre-inspection and a seller-procured inspection and a sewer scope and all the fun things, you should definitely check out episode 119, which

is called Behind the Walls: [5:53] Navigating the Secrets of Home Inspections. It's a great episode. We interviewed a home inspector, and there's a ton of knowledge that he dropped in that one, and it's, it's actually a half an hour long. It's a great, very in-depth episode. So definitely check that out. All right, let's move along.

Joanna: [6:11] All right, we have another big one, the financing contingency. So this gives the buyer a way out if they're unable to secure a mortgage within a certain timeframe. It's a safeguard for buyers. It's ensuring they're not stuck in a contract they can't fulfill due to lack of financing. So for instance, if you lose your job during the time you're pending, this might be a reason you can't get financing.

Christian: [6:38] Mm-hmm.

Joanna: [6:39] If you buy an expensive item like a car while you're pending, and then you get a loan, that might affect your ability as well to get funding. So don't go buy your dream car if you're contracted- … if you're under contract for a house.

Christian: [6:52] Yeah, yeah. Um- The thing, the tip that I've always heard-

Joanna: [6:55] Big, big, big tip.

Christian: [6:56] Yeah. Yes. The big tip, sorry if I'm stealing your thunder, Joanna, but the big tip is if you have to use your Social Security number for anything other than the house purchase when you're pending, when your offer's been accepted on a property, don't do it, 'cause that's something where they're gonna check your credit, and that could stop you from getting the home loan, which at the end of the day, that is your main goal. Don't go buying a car. Don't go apply for 10% off at The Gap because you wanted- No … their credit card. Don't go to Ashley Furniture and buy all the furniture for your new house with financing right before you close. Don't do any of those things, please. No. Like, just, just don't.

Joanna: [7:37] Again, like, this is often a contingency buyers waive during a very competitive time in the market, which is smart. But there is some risk to that, right? Mm-hmm. So you want to know a way to waive this in a more safe manner, and that's to get pre-underwritten. And if you come to the class, once again, we talk a lot about that. But to sum it up very quickly, this is a way, you know the bank has looked at your information and verified it, given you that stamp of approval for qualifying for the loan. So you can waive it safely, you just have to know how.

Christian: [8:13] Yep, exactly. And if you do waive it, your offer looks just like you're a cash offer, because you don't have financing attached to it. So this is a way that you could theoretically compete against all cash offers, and we've definitely beat out cash offers even with loans. So this is, getting pre-underwritten is the key. It's much different than getting just pre-approved. There's way more info that goes into it. And again, just come to one of our classes, or I'm sure we have a podcast about it. I can't remember off the top of my head. But come to one of our classes and we'll talk all about it. It's beersandhomebuying.com (opens in a new tab). You can sign up there, and we have one every single month. All right, moving along. The appraisal contingency. The appraisal contingency is basically when the, when you're getting a loan, the bank needs to verify the value of the house that you are purchasing. They don't want to give you a loan for a property that's not worth what you're buying it at So the appraisal is where they physically have someone come out to the property, they walk the property, they measure it. They don't inspect it. That's the inspector's job. They just measure it and look at stuff real quick to, to verify and compare it to other sold homes nearby that are similar sized. So there… If you're buying a townhouse in Ballard, they're gonna look at similarly sized townhomes in Ballard as comparable homes to figure out the value. Now, if you're buying it for $900,000, but all of the other comparable homes that have sold recently are selling for $800,000, the appraisal, the appraised value might come in at 800 instead of 900, even though you're willing to pay 900. Now, this is a way that can protect you as a buyer, but as a buyer, most of the time, especially our buyers, going through our process up f- up front and going through what we created called a sold search, you know values really, really, really well, and you're not gonna make an offer on something that's way overpriced because you're gonna know ahead of time that it's way overpriced. So this isn't gonna really be an issue. But if it did for some reason come in under value, meaning under what you're buying it for, this does allow you to back out of the purchase and, you know, you don't lose any earnest money or anything like that. Sometimes buyers waive this contingency completely if they're trying to be competitive. Sometimes they also waive this up to a certain dollar amount, meaning they'll say, "Hey, I'll cover a low appraisal up to $25,000 or $50,000 under the purchase price." So again, back to my example. Let's say you're buying it for 900 and you're saying, "I'll, I'll cover the gap in cash on top of my down payment up to $50,000," that means that if the appraisal comes in at 850 instead of 900, you're just gonna pay that extra $50,000 to cover that gap. Now, that said, if it comes in at 825- And you only said you'll, you'll do that $50,000 gap. That allows you, if you want, to back out or potentially renegotiate that purchase price with the seller.

Joanna: [11:30] All right, so we have title contingency. This allows the buyer to back out if there are issues with the property's title, like liens or disputes over property boundaries. Clearing the title is essential for the transfer of ownership, making this contingency a vital part of protecting the buyer's interest.

Christian: [11:50] All right, so the, having a clear title is not something that you need to worry about trying to figure out as a buyer or a seller. That's why the title company is there. The title company's gonna be doing all this work to verify everything's fine. So don't feel like this is a job that you need to worry about. This isn't something at all you need to do. This is why you have a title insurance policy.

Joanna: [12:11] Yep.

Christian: [12:11] All right, moving along. Home sale contingency. So this is also known as a contingent offer. What that is, is basically if you already own a home that you need to sell in order to buy your next home, and you don't have the funds or the ability to get a loan for that next home unless you sell your current home, that's when this comes into play. So let's say I own a house in Ballard and I'm trying to buy a house on Queen Anne, uh, and the only way I can afford the house on Queen Anne is if I first sell my Ballard house. So what I'll do is I will make an offer to the Queen Anne seller and say, "Hey, seller, I wanna buy your Queen Anne house. Uh, it's gonna be contingent upon me selling my Ballard house first." And the seller can say, "Sure, great. You have 45 days or 30 days or whatever, it's all negotiable, to get that house, your Ballard house, sold. Once that sells, then the contract for your, your purchase of my Queen Anne house will come into effect." So the mar- the house is actually still on the market. The Queen Anne house is still technically on the market and available for other buyers to come in. The label that you'll see online just changes from active to contingent. What that means is that if you're, if a different buyer comes in and says, "Hey, we wanna make an offer on your Queen Anne house. We see that it's contingent And they make a great offer, the seller can say, "Awesome, I wanna accept your offer, but I'm gonna enforce what's called a bump period." And this can get a little complicated. It's already sounding very complicated. But it's really not. The bump period just basically says it's usually between three and five days, and it gives me and my Ballard house, gives me that three or five-day period to either find a buyer, stop the, or remove the contingency, or back out of the purchase of the Queen Anne property and allow that other buyer to, to come in. So it kinda puts a, a small window for me to get that contingency removed or just back out of purchasing the Queen Anne place. So from a seller's perspective, it does introduce a little bit of uncertainty, and it's slightly risky, but the house is still technically available for sale, but it's labeled differently and there is that bump period that allows the, the seller to accept a different offer. So that is what a contingent buyer or a contingent offer means. All right. These contingencies are all built into the contracts to protect both the buyers and the sellers, and they're there to ensure that both parties have flexibility they need in a transaction to make sure that they can actually close.

Joanna: [15:01] That's right. And whether you're buying or selling, it is crucial to understand these contingencies and how they can impact your real estate deal.

Christian: [15:09] Yep. And the one thing that I do wanna point out, too, is that these are all contingencies that are pre-written. These are boilerplate, pre-written by attorneys. It's all the same words and verbiage that every single agent in almost the entire state of Washington uses. We all use the same standard forms. This isn't like Joanna and I are- … writing up some weird contract. You know? It's, it's all standard. Nobody's got time for that. And I say that because… Exactly, exactly. And, and I say that because it is important for everyone to understand that, hey, this is the same thing everyone's working with. We're all using the same contracts. We're all using the same documents. You don't necessarily have to have, uh, an attorney review them or anything like that, 'cause it's all standard. Yep. Now, if you want to, you obviously have that ability, but you don't f- don't feel like you have to have an attorney over, you know, review everything, 'cause that's just really an, an… Most of the time this is just a wasted expense. So- I

Joanna: [16:08] will say when I have had clients use a re- an attorney to review, the attorney didn't e- even understand the contract, so-

Christian: [16:17] Mm-hmm

Joanna: [16:18] waste of time. Yes. And I had to explain it to them as well, so there you go.

Christian: [16:23] Yep, yep. Not all attorneys are created equal, that's for sure.

Joanna: [16:26] No. Or keep up- All right, well- … with the times.

Christian: [16:30] Yep. Well, that wraps up this episode of the Awesome in Seattle podcast. We hope you found it very helpful. Remember, you can always consult with a real estate professional or an attorney- to understand the specifics of your contract. But like we just said, you don't necessarily always have to, but you are welcome to if you'd like. Thank you for tuning in. Don't forget to subscribe or leave reviews of this podcast. If you found it helpful, we would love that. And if you ever wanna chat with us, you can do that. We're, it's totally free to set up a, a Zoom call with us, half an hour, no cost, no obligation. You can just go to AwesomeNossumGroup.com/schedule. And if you ever wanna come to one of our Beers and Home Buying classes, those are also free. We do them every single month all over the city, different neighborhoods, actually different cities as well- Yeah all around the Seattle metro area. So you can look at those again at beersandhomebuying.com (opens in a new tab) and sign up there. It's totally free. Generally at a place that serves beer- … and they're free, so. That's it for this episode. We'll see you next time. Thanks, Joanna. Bye,

Joanna: [17:32] guys.