In hot markets, buyers will waive loan or valuation riders to increase the competitiveness of their offer, exempting surprise clauses will help buyers improve their odds of buying a home; but the pros and cons should also be weighed.
Housing markets across the U.S. are suffering from persistently low housing inventory, which has sparked intense competition among buyers.
According to market rules, January is usually a period when home buying transactions slow down, but according to a report released by real estate agency Redfin, January this year became the most competitive month for buyers since April 2020, and the company's real estate agents As many as 70 per cent of offer proposals face competition, the report said.
There's no doubt that an all-cash offer gives buyers a clear advantage over the competition, but for homebuyers with access to financing, they can stand out in other ways, especially by waiving unexpected terms related to loans or appraisals. Realtors say the practice has become commonplace, especially at the high end of the market.
“Most deals over $4 million don’t come with a financing surprise clause,” said Michael J. Franco, a New York-based broker with Compass, a real estate agency. “You almost have to give up in the face of a competitive market environment and competitors who are determined to win. Accident-like clause."
Of course, exempting buyers from surprise clauses also comes with risk. Specifically, in the case of waiving the valuation surprise clause, if the property appraisal given by the lender is lower than the sale price, the buyer can only make up the difference out of his own pocket; in the case of waiving the financing surprise clause, if the buyer's loan If the application is not approved, they may suffer loss of deposit.
Buyers who want to gauge the risk and reward of waiving surprise clauses need to carefully assess their financial situation and market conditions, as well as the success rate of their loan application and the likelihood that the property will be valued at or above the sale price.
More and more buyers these days believe it is worth taking the risk of waiving surprise clauses in order to secure their desired listing.
"When buyers write offers, competition fuels their creativity," said Brad Wolf, agent for the southeastern Michigan region of The Agency. "When buyers and sellers are evenly matched, we include surprises in offers." The terms are happy. But the fact is that buyers also know that in a seller's market, they must find ways to increase the competitiveness of their offers."
Buyers considering waiving surprise clauses should work with an experienced broker because a professional can help them better judge whether the decision is the right one. Jennifer Leahy, a broker with Douglas Elliman Properties in Westchester, N.Y., and Connecticut, said: “I usually ask my clients, if the appraisal is lower than the sale price, would you be willing to make up the difference yourself? Can you face the consequences of losing the deposit? Although this possibility is not high, I will try to remind the potential risks as much as possible, so that the customer can fully understand the essence of the contract they signed."
Tight inventory has posed a huge challenge to buyers across the U.S. since the outbreak began, and the situation shows no signs of improving anytime soon. Taking Denver as an example, the Denver Metro Association of Realtors said that the small increase in housing stock in February this year did not fundamentally solve the problem of "difficulty in buying a home", and there were only 1,226 units listed for sale on the market. hit a record low.
“Like most major markets, we quickly realized that the pandemic wasn’t going to slow the market down,” said Ashleigh Frederickson, a Denver-based agent at The Agency. “In the early days of the pandemic, buyers’ perceptions of homes changed and they started The search for more spacious living space has led to less emphasis on commuting distance. Since then, our market has become increasingly competitive due to low inventory.”
Leahy said many New Yorkers have moved to the suburbs of Westchester and Fairfield, Conn., in pursuit of living space and privacy, where housing stock has declined significantly from pre-pandemic levels. Competition remains moderate in the high-end home market of $8 million and above, but competition is fierce for more affordable listings.
“Inventory levels are down 40 to 50 percent in some areas,” she said. For mid- to high-end homes, 10 potential buyers may compete for the same listing; for homes under $2 million, sellers may even There may be as many as 25 buyers to deal with, and opting for an offer that waives surprise clauses can save them unnecessary hassle.”
After a lackluster performance in the early days of the pandemic, the luxury home market in Manhattan has continued to heat up in recent months, although many workplaces have yet to fully reopen. In the first quarter of 2022, 3,585 homes were sold in Manhattan, and transactions totaled more than $7 billion, a record for the same period in the previous year.
While Manhattan hasn't struggled with low inventory like other markets, inventory levels have tightened recently. “The Manhattan housing market is very different from the overall U.S. market,” said Kimberly Jay, a Compass broker in Manhattan. “We have our own patterns. But right now, housing supply is very tight. In October 2020, there were about 10,000 units on the market. There are only about 5,300 houses for sale now. High-quality properties are very popular at any time.”
Sellers know they have the upper hand in the market, and as buyer competition intensifies, all-cash offers are more likely to win. In the first quarter of this year, nearly half of all home purchases in Manhattan were made in cash. But for buyers in need of a loan, waiving surprise clauses may be the key to their success.
"Sellers want confirmation that the deal will go through, so we'd better cater to their needs as much as possible," Frederickson said. "Reducing additional surprise clauses in the contract will help you compete with cash buyers."
Waiving surprise clauses can give buyers an edge over the competition, especially when they're taking advantage of financing and competing with all-cash buyers. However, there are also financial risks involved, so buyers interested in using this strategy should consult a professional to determine if they can deal with potential downsides. For buyers who are considering waiving unexpected terms on financing, having an open and honest conversation with a mortgage broker is critical.
Frederickson said: “Like most buyers, if you do have a loan need, you need to have a deep and sincere conversation with the lender, especially for first-time buyers who don’t have a lot of money. Getting a loan pre-approval sooner also Can help.” When deciding whether to waive the valuation surprise clause, it’s best to work with an enthusiastic broker who has a thorough understanding of the market and can professionally help buyers predict the valuation of a target listing.
Frederickson said: "As a buyer's agent, I am willing to take the initiative to undertake the task of valuing the property. I will comprehensively examine the overall valuation plan, the upgrading and renovation project of the house, and the comparable property valuations of the same type."
The surprise waiver is more suitable for buyers who have received assurances from lenders that their loan application will go through smoothly, and those who have enough liquidity to be able to make up the difference if the home appraisal falls below expectations. It should be emphasized that this is not a must for everyone.
"From a buyer's broker's perspective, I would only advise clients to waive the surprise clause if the client's mortgage application is tentatively approved and voluntarily," Leahy said. "But if they have concerns about it, there is absolutely no need to be Coerced by the current fierce bidding war.”
Buyers may find that some types of homes receive less attention, even in hot markets. In the Manhattan luxury market, for example, the bidding wars are not as intense as those in the New York suburbs, and demand tends to weaken for properties that aren't ready to move in.
Franco said: "In the New York City area, buyer competition has not yet reached the level of white-hot, and the specific situation needs to be analyzed. Some good listings can receive multiple offers at the same time, while others are under-represented, especially those in urgent need of repair. condo units, because buyers don’t want to take the time and effort to renovate them. Plus, it’s not as hard as it gets in Greenwich, Connecticut, or the Hamptons.”
Jay agrees, noting that older co-ops that haven't been renovated recently don't attract the attention of a lot of buyers. For these types of listings, buyers may not need to compromise on unexpected terms. She added, “There’s relatively little competition for homes that need major renovations. Also, the New York market isn’t growing as fast as the rest of the country, so buyers can get a good deal on any type of home right now.”