Late last year, my husband, Tom, and I almost bought a house that we were not prepared for. Several months later, we found ourselves ready to give the home-buying process another shot—and this time, we felt prepared.
But we were in for some surprises. The inventory in Southern California has not kept up with the demand, and competition is fierce. Bidding wars have become commonplace, which has resulted in buyers submitting all-cash offers, waiving inspections and removing contingencies. That is just to get an offer selected—getting the mortgage has its own set of complications.
When Tom and I found another home we loved, we wrote a strong offer. Ignoring a warning from our real estate agent, we also removed our appraisal contingency. We won the bid, negotiated inspections and got preliminary loan approval. The last step was our appraisal, which, much to our surprise, came in way below our offer. The bank would not lend us what we needed, we didn’t have enough cash to make up the shortfall and the seller wouldn’t negotiate the price. So we lost the house. Even worse, by waiving our appraisal contingency, we nearly lost our good faith deposit of $20,000.
If you are in the market for a home, here are some of the things we learned in our second attempt at home ownership that went beyond the offer price:
- Contingencies: Loan and appraisal contingencies are there to protect a buyer in case things don’t go as planned and you have to back out of an offer. Unless you can buy the house without a loan or are 100% certain that your loan will fund, beware of waiving any loan contingencies.
Appraisal contingencies are just as important. Sure, most appraisals tend to come in at the offer price (appraisers report the lower of either the contract price or the appraised value), but sometimes they don’t. Unless you have the cash to make up the difference between your offer and what the house appraises for, waiving the appraisal contingency could cost you your deposit or worse. - Employment: Tom switched jobs a year ago, and this caused problems with our mortgage application. Banks like to see continuous employment, so if you are looking for a mortgage, be prepared to jump through hoops to give them every last detail about your last several years of work. They will likely call your old boss too, so don’t burn any bridges.
I thought getting an offer accepted was the hard part. As an efficient-market believer, I figured the appraised value would be whatever I was willing to pay. But this seemingly perfunctory part of the process blew up our entire deal—and nearly cost us $20,000.
So make sure to mind the small print on your contract and mortgage application—your money may depend on it.
