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April 5, 2021

What You Risk When You Waive Contingencies

The San Francisco market has come roaring back after the initial Covid slowdown in 2020. We are heading into a robust Spring, and it seems like buyers and sellers are making up for last year’s lost time.

That’s led to very competitive offer situations and high sale prices, particularly for single-family homes and condos in smaller buildings. Most multiple-offer situations end up with a handful of buyers waiving all contingencies (e.g., conditions of the sale) in order to make their offer as attractive as possible to the seller.

But do all buyers realize what’s at stake when they waive all contingencies? Sometimes I’m not so sure.

When you make an offer on a property, you typically include a 3% earnest money deposit that you place into the escrow account upon offer acceptance. That money sits in the escrow account and is related to what’s known as the “liquidated damages” clause in the contract. In other words, if a buyer backs out of the sale without using one of the contingencies as the reason, the sellers are within their rights to retain that deposit money for damages incurred.

That deposit is at risk if a buyer waives the major contingencies (e.g., inspections, appraisal, loan) and a complication arises in one of those areas that forces the buyer to reneg on the contract. Given San Francisco prices, that amount of deposit money is significant.

I discuss all the ins and outs with my clients about contingencies and whether it’s possible or desirable to waive them in a competitive situation. There are certainly many instances where buyers should not be waiving major conditions. This decision is very specific to one’s financial situation, and shouldn’t be taken lightly. Make sure you discuss the larger perspective with your agent and lender before you risk your deposit money.

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