3 Ways Homebuyer Protections

These days, homebuyers are feeling the crunch. A recent report found that 35% of buyers didn’t make an offer on a home they were interested in because it was already in a multiple-offer situation. Only adding to buyer frustrations, the normal contingencies and homebuyer protections normally used in the purchase process are now working against them, as other buyers in the market are ditching them in order to gain competitive advantage with sellers.

But, if you’re a buyer, that doesn’t mean you have to lose your shirt, too. Instead, by working with a licensed real estate agent to navigate using homebuyer protections, you can safely compete in this market — shirt intact! Here are the pros and cons of homebuyer protections you should be aware of for a sellers market, and some guidance on when (and when not to) use them.

Appraisal Protections For Buyers

PRO: If a buyer is obtaining a loan, the lender will only provide funds based on the appraisal value of the home. That may or may not align with the list price. In this current bidding-war market, it’s becoming more common for the sale price to skyrocket well over list price and even appraisal value. An appraisal contingency can offer the homebuyer protection by releasing them from the obligation to pay more than the house is worth if the appraisal comes back low. In the past, buyers have relied on this protection knowing that if the home doesn’t appraise for the purchase amount, there could be an opportunity to renegotiate the purchase price with the seller.

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CON: Buyer desperation has kicked into high gear in such a way that many buyers are agreeing to pay over appraisal value. Since sellers are in the driver’s seat in this market, they want to get the most amount of money out of their investment, and they have enough interested buyers to throw out any offers that might limit their profit. It’s worth noting that  23% of home sales in March 2021 were cash, which doesn’t necessitate an appraisal in the first place. So, if buyer offers are not cash or are not willing to pay over appraisal, they are simply less desirable in this market.

Home Sale Contingencies For Buyers

PRO: Home sale contingencies exist for a reason. Buyers want the protection to sell their current home before closing on the next home to avoid a scenario where they have two mortgages. Just recently, 38% of recent home buyers reported using funds from the sale of a home to purchase a new home. With home sale continencies, buyers and sellers coordinate the new purchase to align with the sale of the first home—and this has typically worked well for many years for both buyers and sellers.

CON: Sellers have realized that they don’t need to accept a contingency offer. In fact, 18% of homeowners recently reported they did not accept a contingency offer because they’d received other offers with no contingencies. Since the buyer’s home sale could fall through for various reasons, sellers don’t want to risk it if they don’t have to; and in this market, they usually don’t. This has put buyers in the predicament of either selling their home first and living in temporary housing to avoid using a home sale contingency, or purchasing the new home first and carrying two mortgages for a brief time.

Inspection Period For Buyers

PRO: One of the most common protections in place for buyers is a home inspection. Since many costly problems with a home can be unseen to the naked eye, it’s important for a licensed professional to do a thorough home inspection on behalf of the buyer. This protection offers buyers the opportunity to walk away from the contract if catastrophic issues are found during the inspection or to renegotiate the purchase price on behalf of the buyer.

CON: As with just about all the other homebuyer protections, many buyers are choosing to waive home inspections. While this can be incredibly risky for buyers, it’s just one more way to stand above the competing offers. Sellers are in a position where they do not have to make repairs to sell their homes, so any offer that waives an inspection has appeal to the homeowner. If buyers are going to proceed with the protection of a home inspection, they should consider stating in the contract that they won’t ask for any repairs unless they exceed a certain dollar amount.

When to Use Homebuyer Protections

Though the national picture of real estate favors sellers, real estate is still a localized market. Not everyone’s market is experiencing the same levels of competition, so this is where working with an experienced agent comes in handy. Your agent has a finger on the pulse of the market, and can guide you to which homebuyer protections you might better “get away with,” if there are any.

For example: if prices are high in your area, but competition isn’t as stiff, perhaps you can still incorporate an appraisal contingency, but forego a home sale contingency. Or, if you and your agent have done your homework on the comps in the area, you may feel more comfortable going without an appraisal contingency. There isn’t a one-size fits all solution, so working with an agent will better equip you to know what you should or should not do.

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