Should I wave the home inspection?
It is no secret that the Phoenix housing market is extremely competitive. We have been hearing many stories about houses that are receiving fifty showings in a weekend, thirty offers, and in some instances where offers are being made $150K over asking. It is certainly understandable with this type of competition, that buyers are desperately looking for a creative and competitive advantage (so that they receive an accepted offer and find a place to call home).
What are some home buyers doing to stand out in a competitive market?
To get a better idea of some of the creativity buyers have been using to win deals, we asked Managing Broker and Co-Founder of The Brokery, Tucker Blalock what some of his clients have been doing. Tucker said, “In this low inventory environment, I have seen buyers pull every card to try and win a deal. More often than not, buyers have been waiving their appraisal contingency, shortening their inspection windows, and allowing earnest money to go non-refundable early on in the process to try to secure the home.”
Waiving an appraisal contingency
What is an appraisal?
An appraisal, in the optics of a home purchase, is where a qualified third party creates a report to determine the present value of a property. The findings of the report are based on a visual inspection of the property, recent sales of similar properties generally in the same proximity, market trends, and attributes of the home.
The buyer orders the appraisal. Lenders take this step to make sure that their buyers are not overpaying for homes. Lenders won’t loan buyers more money than what a home is worth. An appraisal can alert a buyer that they are overpaying for a home.
What happens when you waive the appraisal contingency?
When you waive the appraisal contingency, you agree to pay the full amount of the contracted price, even if the appraisal comes in lower than the agreed-upon price. If you have obtained a loan, the bank will loan you up to the appraised price and you agree to pay the difference. If you are a cash buyer, you can waive getting an appraisal altogether.
Shorter inspection periods
The standard due diligence, or inspection period, in the State of Arizona, is ten days after the contract is accepted. In this period, the buyer is allowed to perform their exploration of the property to determine if they would like to proceed with the purchase of the property. Typically, during this period, a buyer will have a home inspection. After completion of the home inspection, the buyer can determine if additional exploration of the home’s components is necessary. This may include an HVAC technician, environmental testing, plumbers, electricians, painters, roofer, general contractor or even a structural engineer. This allows the buyer to extensively discover the condition of the property, the installed components, obtain estimates for current repair, future repair, or even expansion of the property. As you can imagine, this is a pivotal moment in the purchase of the property.
In the current market, in an effort to strengthen the offer, buyers are frequently shortening the inspection period to five days or even less (we’ve even seen 1 day!). The appeal to the seller of the home is that the potential buyer would have less time to discover potential pitfalls or roadblocks on the path to purchase.
The strategy does seem to be more attractive to sellers. If, as a buyer, you choose to shorten your due diligence, it is recommended that you establish a relationship with a very thorough, experienced and professional home inspector (they may not be the cheapest) that can deliver the report in a timely manner. After establishing a relationship, ensure that they can meet the timelines of your contract prior to making the offer. Additionally, it may be beneficial to retain an inspection company that can perform multiple inspections at one time, such as the home inspection, termite inspection, pool inspections, mold testing, and sewer scopes. If you have suspicions about the aging of expensive elements (ie HVAC, roof or electrical) it would be proactive to prepare for having licensed tradespeople visit the property as well.
Allowing earnest money to go non-refundable
Earnest money is effectively a “deposit” that a buyer puts down when the initial offer to purchase is accepted. Usually, the deposit is 1 - 2% of the purchase price. This money then gets held in an escrow account for safekeeping. Typically, during the purchase of a house, the earnest money is refundable until after the negotiations of the due diligence period have been completed and the buyers and the sellers have come to an agreement to continue forward with the contract. At this point the money would then become non-refundable, meaning that if the buyer then failed to perform with the completion of the contract, the seller would be entitled to keep the earnest money. This is used with an intent to protect the seller and provides the incentive to pull the property off of the market during the purchase process.
What does it mean to allow earnest money to go non-refundable?
As Tucker mentioned, a strategy buyers are using is to allow their earnest money to go non-refundable earlier in the purchase process. This is likely enticing to the sellers, as the buyer has a non-refundable deposit. Thus, they have an incentive to perform and proceed with the purchase of the property or they risk forfeiting a sizable amount of money. This strategy could certainly be effective for winning the deal, especially if the buyer is fairly certain that this is the home for them.
Writing personal letters
This is a strategy that my family has used in the past when submitting an offer on a house. The intent is to potentially attempt to create an emotional connection with the seller in the hopes that they would make considerations beyond finances. In the current market, most people believe that this strategy would not be a factor. I believe that the effort is reasonably minimal and it could not hurt to add it to the offer. Maybe a well-crafted letter could serve as the tiebreaker between two strong offers, and it's worth taking a chance. Although the letter must be written carefully, there is the potential for violations of the Fair Housing Act. So, if you choose to utilize this strategy, do your research and write the content within the guidelines.
Offering more money
The fastest way to strengthen your offer on a home purchase is to increase the price that you are willing to pay. If the buyer is willing to pay more than the list price of the house, the seller is going to take notice. The buyer does have to understand that the house may not appraise at the price that is agreed upon, and therefore their loan may not cover the entire purchase of the house. The buyer would then have to pay the difference out of pocket so that the transaction can be completed.
In the past few months, we have seen over-asking deals as low as $1 and as high as $250,000 over asking. Of course, the best strategy for an over-asking offer depends on a number of factors such as price point, location, competitive buyer interest, your interest, condition of the home, etc.
To avoid buyer’s remorse, before making an aggressive over-asking offer, it is best to strategize all existing factors with your experienced Real Estate professional to ensure a reasonable amount of “extra” money is brought to the table.
It is especially important to rely on the home inspection for important data about the house so that you can assess the potential for major problems and are not blinded by the competitive landscape or fear of missing out.
Offering cash
Traditionally, offering cash for a home is a very strong strategy for the purchase of a home. A cash offer quickly qualifies the buyer as a strong candidate because they do not need to rely on funding from a financial institution. This also eliminates the need for an appraisal of the property which can derail funding from a financial institution. A cash offer can also speed the closing date. In fact, there are some sellers that will accept a lower offer price for their property because of the attractiveness of a cash offer as it is often perceived that there are fewer potential pitfalls that occur during a cash transaction.
Offering incentives to the sellers
Offering incentives to sweeten the deal, outside of strictly increasing the monetary offer, is a great way to incentivize sellers and catch their attention. It will also signal that you, as the buyer, are serious about the purchase of the house. It is an avenue that will allow for creativity and potentially offer flexibility to the seller. Some creative incentives that we have seen, that may help to win deals, include telling the seller that they will not ask for repairs (but still have the inspection), allowing the seller to remain in the house for an extended period of time, offering the seller a year membership of Tequila of the Month Club, paying for the sellers moving company, waiving appraisals, etc
Jonah Joffe of the joffe group
Jonah Joffe of The Joffe Group and Launch Real Estate mentioned, “In a market this crazy, buyers are having to get very creative in order to service the seller and secure a deal. Often, buyers are allowing rent-free leasebacks to sellers while they move into / find a new home. We are also seeing buyers waive appraisals and offer prices over asking. The most effective way for a buyer to stand out is to work with an agent who has existing relationships and can cut to the chase in order to find out what will get the deal done.”
Shorter closing periods
Another effective strategy is to shorten the time for the length of the purchase. We’ve seen buyers shorten their closing period to incentivize sellers. This displays strong buyer intent to close the sale of the property and it provides proof that they are able to perform (ie financing is in order). The thought is, the shorter the time frame that the buyer is willing to purchase, the less likely the purchase is going to fall apart.
Waving home inspections
Certainly, there is a strategy that has been used to make an offer more competitive, and that is waiving or skipping a home inspection. While we do not advocate skipping a home inspection for many, many, many, many reasons, we understand that it is happening and it is obviously very attractive to sellers, especially if the sellers know the house has potential issues.
We asked Tucker if there was a time he would be ok with waving his client’s home inspection, “In my experience, it all depends on the client's risk tolerance. Every real estate deal is different and every buyer is different. I wouldn't be against waiving the inspection if my client is planning to do an extensive renovation or if the buyer really wants the property and has the financial wherewithal to take on some unknowns.”
In most cases, waving a home inspection is a very drastic step in order to stand out amongst the crowd of potential buyers and strong offers. It is a strategy that should come with extreme caution, including the buyer signing documentation that they are aware of the potential risks and pitfalls.
We talked with Johan about when he’d be comfortable skipping an inspection. He stated, “In today's market, important conditions are getting waived constantly, the home inspection is something I would not recommend waving under just about any circumstance. Even if your plan is to purchase the home without asking for any repairs or credits, the inspection can reveal deal-changing details that could affect buyers' use of the home and their decision to move forward with the purchase.”
Additionally, if the seller accepts an offer that waives the home inspection, they should be aware that there are potential risks as well. This then puts extreme focus on the seller to provide very specific information on their disclosure of the property. Any potential deviation and omission could potentially land the seller in legal conversations.
In all, there are numerous strategies that provide all parties involved in the transition (buyer, sellers and real estate agents) better options than skipping a home inspection. The intent of the home inspection is to provide the buyers with a realistic depiction of the condition of the home and to determine if there are any habitability concerns. Dwell Inspect Arizona can provide unbiased, fast, and accurate reports to better assist you with making an intelligent purchase so that you, as the buyer, do not make a purchase that you regret. We suggest you use other strategies and creativity to strengthen your offer and, at all costs, do not skip the home inspection unless you are aware of the risks.