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Dealing with Contingencies

Lately, one of the biggest issues I have been facing with agents is the concept of "contingencies"...

Notice, I said agents, not buyers or sellers.

In a contract, "contingencies" are the little protections we have so we can back out of a deal if the home isn't what we expected, or we can't get the loan, or it doesn't appraise, or the seller can't find a replacement property, or a slew of other issues.

They're designed to help you sleep better at night knowing you're not buying a worthless money pit. However, Agents treat these contingencies as more than simple protections.

A quick example: Let's say you are buying a house, and you're getting a loan. Odds are, you will rely on your "loan contingency" to protect you until you're approved. In any case the loan gets denied, you can cancel. However, sometimes Listing Agents press really hard for a buyer to remove the contingency before the loan is approved.

While I see the point, I don't think the agents do.

In many transactions, the Seller is buying another property. They have their own contingencies with the new property, and a hounding listing agent as well. Listing Agents want buyers to remove contingencies so they can move forward with their new purchase. I understand, but there is a HUUUUGGGEE disconnect there. Here it is:

Just because someone removes a loan contingency, that does not mean the loan is approved.

Someone can remove the contingency and get denied. Agents remove contingencies, lenders approve loans. Most agents discuss with the lender about the loan contingency, so they are in the same ballpark, but many listing agents struggle to separate them. This is bad for at least two reasons:

  1. The buyer may feel pressure to remove a protection while they're still using it. Like putting away an umbrella in the rain while you're still outside.

  2. Sellers misinterpret the meaning of removing the loan contingency has being approved and may put themselves at risk with their subsequent purchase by removing their OWN contingencies before they should.

The problem is, most agents don't understand these concepts. Even some of the best agents I've met are foggy when it comes to this. Most people are stressed and emotional during this phase, and short with their agents over the phone. When we come to these pivotal points in a purchase, we need to slow down, discuss, educate, and work towards making rational decisions... not emotional knee-jerk reactions which will get us in trouble.

Last Disclaimer:

This is a very complicated topic (one of hundreds), and this is just a quick rant on the subject.

And by "one of hundreds" of complicated topics, I mean that there are over 10,000 words in the purchase contract (I counted, and that doesn't include the other 3 disclosures you sign with an offer)... and the Loan Contingency I've been talking about is less than 100 words.

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