When buying a condo, you may find yourself in a competitive bidding situation and your realtor may ask you about waiving some or all the contingencies in your contract. These contingencies are usually things like a home inspection contingency, appraisal contingency, and financing contingency. But waiving contract contingencies on a condo can be risky.
Home inspection contingency
For the home inspection contingency, some homebuyers do a pre-inspection in advance of making an offer. With a pre-inspection, if it does not show any major problems with the condo, that gives the homebuyer the comfort level to waive the home inspection contingency in the sales contract.
Some homebuyers will forgo a home inspection or a pre-inspection altogether without even doing a pre-inspection. Maybe there is not sufficient time for a pre-inspection prior to making an offer. And I have talked to homebuyers who think that there is less that can go wrong on a condo versus a detached home, so they are comfortable waiving a home inspection contingency. And there are some homebuyers that want a condo so much that they are willing to forgo a home inspection and simply take the risk of anything that may need to be repaired.
Waving an appraisal contingency is a tricky proposition, as you really need to have sufficient cash reserves to cover any potential shortage between a low appraisal and the contract price. Without an appraisal contingency, the buyer is responsible to make up the difference between a low appraisal and the sales contract price.
I have had mortgage borrowers who don’t have tons of cash, in fact, most of their cash is gift money. That means in case of a low appraisal that they would have to ask if their gift givers would kick in extra cash, if needed.
Or there are times when I have had a borrower who planned on putting a 10% down payment down, and when a low appraisal happened instead did a 5% down payment. Increasing the leverage helped reduce the down payment which freed up cash to make up the shortage between the contract price and the low appraisal.
Waiving a financing contingency on a condo may not be wise. When considering whether to waive contingencies, the financing contingency is the one that is riskiest to consider waiving. Even with borrowers who are easily qualified, there is a risk because there is still a condo approval required. The condo approval guidelines will be dictated by the type of financing involved.
With FHA and VA condo loans the process is much simpler than for Conventional loans. A condo has to be on the FHA approved condo list to be eligible for an FHA loan, and a condo has to be on the VA approved condo list to be eligible for an VA loan. However, there is no master approved condo list for Conventional loans.
If you are getting a Conventional loan for a condo, the lender has to go through a thorough process of checking the Master Certificate of Insurance, the budget, the reserve account, and reviewing a “Condo Questionnaire” that lenders use to ask the property manager of the condo numerous questions related to how the condo is run. Based on all that data a condo approval is then decided upon, to also approve a mortgage borrower who is buying a condo.
It is rare to have a condo declined, but it happens occasionally. And it can take weeks to get what a lender needs from the property management company to determine if the condo is approvable or is going to get declined. And there are now more issues to analyze to get a condo approved in the wake of the Surfside FL condo collapse in June 2021.
If a homebuyer wants waives their financing contingency on a condo purchase, they may lose their earnest money deposit if the condo does not get approved. So it is important to know that while waiving contingencies on a single family home or townhome may be acceptable, if it is absolutely needed, waiving contract contingencies on a condo carries more risk due to the condo approval that is needed.
Condo document review
Realtors will many times respond, “well, we have a condo doc review period, so we can pull out of the deal then if we discover a problem with the condo during the condo document review.” The problem with that is that most condo doc review periods are very short, like 3 calendar days or 5 calendar days, and a lender may need weeks to get the condo questionnaire and other condo docs they need to make a decision on condo approval. And the condo docs the homebuyer reviews are basic docs like the condo’s declarations and bylaws, which are boilerplate documents, and nothing the lender reviews for condo approval.
So, we usually don’t have enough time within the condo docs approval timeline to figure out the condo approval. Although the one time in recent memory that I remember a client of mine waiving all their contingencies, and the condo got declined, the sellers understood it was not the buyers who were at fault and still returned the earnest money deposit.
There are extra layers of complexity to buying a condo that don’t exist when buying a home. A condo has a lot more moving parts than a home, so be careful if you are going to consider waiving your financing contingency. For other condo issues you can educate yourself on click here. And to contact me to discuss your condo questions, or other mortgage questions, click here to schedule a call or you can email me directly.