Let’s talk about the Financing Contingency

Written by Erica Anthony | December 3, 2021
 
One of my buyers sent me this article yesterday: https://www.dailymail.co.uk/news/article-10262293/Family-loses-320-000-house-deposit-shocking-legal-loophole.html
 
This is a great example of an article using a scary and generally incorrect headline to get more views. A couple points:

1. Real estate is very location-specific. Standard forms and typical practices in different parts of the world (and even different parts of the same country) might look very different. It’s good to keep this in mind when reading about real estate transactions online.
2. A real estate contract is the result of negotiations between buyer and seller. The article says “The sellers removed a section in the contract’s fine print that a standard home sale agreement will usually contain, called a ‘subject to finance’ clause.” The buyers were aware of this change and decided to move forward with the purchase. Yes, their agent and lender (more on this below) should have educated the buyers about potential consequences. But this is not a “weird” detail in the contract or a “shocking legal loophole” as the article claims. Honestly, this is just standard real estate in 2021.
3. The buyers did not get preapproved by a lender before submitting the offer. This is their biggest mistake and how this entire situation could have been avoided. Even one conversation with a lender would have told them they could not buy this house.
4. A 10% deposit is abnormally large. Around Seattle, the standard contract limits a buyer’s earnest money loss to 5% of the purchase price (unless the buyer decides to release the money to the seller early).
5. The buyers regrettably lost money that was intended to go towards the downpayment on a new house. We can assume that money had been in savings. Afterwards, why did they have to max out credit cards and overdraw their bank accounts to stay afloat? That makes no sense to me. If that was the case, it sounds like they really had no business buying such an expensive house ($3.2M Australian dollars is roughly $2.26M US dollars).

 
The reality of the Seattle area market is that many buyers end up waiving the financing contingency. This is a common practice to win offers, especially recently. However, there are inherent risks associated with doing so and it’s important that a buyer understands them. A buyer should ALWAYS be pre-approved and, if possible, pre-underwritten by their lender before submitting an offer. They should discuss with their lender and agent to decide if waiving the financing contingency is a good offer strategy for them.