For most of the last three years most of my clients were home sellers. This month, however, I have had several transactions where I represent buyers- and I have some thoughts from this side of the negotiating table.
The topic for this week is the loan contingency. What is it and what happens when you remove it?
What is a Loan Contingency?
At it’s foundation, a loan contingency says, “I will buy this house if I can get the loan”. And, if I don’t, I won’t.
You’d think the answer is straight forward like, “are you pregnant or not”? However, with the chaos that our lending industry is in, the answer is, often, “maybe”
What happens, when the answer is, “Maybe”?
In life, I think the worse situation is “maybe”. With “yes” or “no” our path is clear- but “maybe”? Maybe is always complicated and, in residential sales, no one gets to feel like they are holding the fair end of the stick. Buyer and seller, alike, feel at a disadvantage.
What are the buyer options?
Most buyers, these days, are very afraid of “maybe”. If they remove their loan contingency, they could lose their deposit if the banks through in a curve ball. That is a lot of risk. And, buyers have the impression that the banks barely know what they are doing and that they are untrustworthy.
This is not an unreasonable opinion.
If they do not remove the contingency in the time given (standard is 17 days), the seller can try to cancel the sale.
Should that happen, the buyer can either agree to the cancellation, remove the contingency or refuse to do either and hope the seller is bluffing.
The buyer will feel like the whole thing is unfair. They entered into contract with the idea that they would not have to risk anything until they had assurances that the property was in acceptable condition and the loan was secured. “I did everything I was supposed to.” the buyer is thinking. “Why is everything for the benefit of the seller?”
What are the seller options?
In the real estate market, today, a seller generally has more than one offer to choose from (or they have no offers at all).
Every buyer will offer to remove the contingency in 17 days- this is the accepted standard and everyone is optimistic they can perform.
However, no matter how well qualified the buyer is, the chance that the banks will not perform on time is pretty high. This does not mean you chose the wrong buyer- this is a reality and our industry has not yet adjusted.
If the buyer refuses to remove their contingency you must decide; give the buyer more time or cancel the deal. Factoring into your decision is the state of the loan process- what is getting in the way of an approval and how much longer will it take?
Is the delay procedural? Have the banks received all the information they need and are just looking for cleaner copies or more recent statements? Or, is there new or outstanding information that still needs to be assessed? Understanding the nature of the delay is critical.
If the delay is procedural, this will feel quite unfair. You might think, “Why is the buyer extending my risk for such a small and trivial matter? If they are so unsure of their ability to get a loan they should just cancel and let everyone move on with their lives. Everything, so far, has been for the benefit of the buyer.”
Ok, This is the Agent Talking. I am the Calming Influence.
You are both right. This is so unfair. You are both good people and you have both done everything you can to hold up your side of the deal.
But, focusing on “fair” will not help.
Instead, let’s focus on the facts. Mr. Seller, I suggest asking the buyer for documentation from the lender to see, for yourself, what is really outstanding. Then you can make an informed decision based on facts instead of fear.
Most lenders will resists this request, by the way. However, if the buyer directs the lender, there are many ways to do this without violating any confidentiality rules. Ms. Buyer? This is a reasonable request. Do what you can to give this assurance to the seller.