What are the Contract Contingencies You Should Ask for in an Offer?

The Weekly Recap

Good morning and happy Friday! Wall Street bonus payouts hit an all time high this year, the back to office push is getting more intense. Mortgage applications jumped 81% in Q1 for Bank of America, Park Avenue is still a much sought after address for Wall Street firms, NYC is trying to pass major scaffold reforms and you can get free beer for an entire year from a SoHo BrewPub as long as you get the companies logo tattooed on you.

If you missed last weeks newsletter What are the Contract Contingencies You Should Ask for in an Offer, you can read that through the link.

Why Real Estate Remains a Cornerstone of Financial Security

Contingencies can be a buyer’s best friend when submitting an offer as it protects you from any uncertainties that may come up throughout the contract phase of the deal. Protecting your downpayment and position in the deal can provide an immense sense of security with the multiple hurdles needed to jump in order to get to a successful closing. Here are the most common contingencies found in contracts for real estate transactions.

Mortgage contingency- this is by far the most important constraint to add to your contract if you are financing. What this contingency does is protect your downpayment if for some reason the bank will not lend due to issues with the building or for some unforeseen scenario that may occur in your life. If you cannot complete a deal because you cannot get lending, your deposit is returned to you with no strings attached and with the exception of a bruised ego and lost time, you are relatively left unscathed. If you did not have this contingency and the bank could not lend to you, not only would you lose the deal, you would lose your money that was put into escrow.

Appraisal Contingency- this provision is put in place if you are financing and have paid over asking for the home. If the appraisal for the home comes back as way less (5-10%) than what the purchase price is, a bank will determine that the delta is too large and that in order for them to lend either A) the purchase price is renegotiated or B) the buyer puts that delta down in additional downpayment to bridge the gap. With this contingency, it protects you as a buyer to walk away from a deal if it does not appraise near where you are purchasing.

Sell to Buy Contingency- this is the toughest of them all. It’s very challenging to time the sale of your house with the purchase of another. It becomes a chicken and egg conversation of which should come first. It’s best to do both simultaneously but if you find a home to purchase before you find a buyer for your home, it’s important to add to the contract of the home you’re newly purchasing that you cannot close on that new home until you sell your current one. This is a tough pill for sellers to swallow as there is no definitive timeframe on when a purchaser will have their home go into contract.

Should we make a deal contingent upon a home inspection? The short answer is no. The reason being that an inspection of the property should take place during the due diligence period before you sign a contract. If the inspection comes back with major defects, you can negotiate those points before getting into an executed contract. If there are minimal issues, like a window needs repair or outlets aren’t functioning, those are small fixes that you can make closing contingent upon their repair, or the seller may offer a credit for the buyer at closing to fix them on their time so the seller can just leave the property without the hassle of repairs.

While contingencies are great at protecting buyers, they can also weaken your position in the offer phase. The more contingencies you have in an offer the less attractive it is to a seller. A buyer who is all cash won’t need a mortgage contingency or a sell to buy contingency making their offer much stronger, even if it’s a lower number than your offer. At the end of the day it becomes prudent that buyers make their own decisions on what to make a deal contingent on or not.

In my experience, if someone is financing I would NEVER tell a buyer not to have a financing contingency but in certain markets, that point can be a make or break for a deal. The only person who can make that determination effectively about their risk tolerance is the buyer themselves.

Market Performance

Here are how some other indexes and asset classes have performed as of this morning’s opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past MONTH as well as newly signed contracts in Manhattan. Huge increases MoM.

Mortgage Rate Update

Mortgage rates decreased two basis points week over week. Recent mortgage rate stability has allowed buyers to feel more comfortable entering the space as its been reflected in the overall increase in purchase applications, indicating positive momentum continuing into the spring selling season.

News You Can Use

• Wall Street Bonus Pool Hits Record $47.5 Billion for 2024 Bloomberg

• Bank of America Mortgage Applications Jumped 81% in Q1 Reuters

• Understanding Rent Regulation in NYC New York Times

• Five Years Into the Remote Work Boom, The Return to Office Push is Stronger than Ever CNBC

• US Corporate Profits Hit Record High Reuters

• US Economy Grew 2.4% Last Quarter as Profits Jumped Bloomberg

• NYC to Pass Major Scaffolding Reforms The Gothamist

• In Today’s Upended Office Market, the Park Avenue Mystique Remains Wall Street Journal

• How the Rich Use Insurance to Invest in Private Credit Without Steep Tax Bills CNBC

• Diverging Economic Data Begs the Questions: Is a Slowdown Coming? Bloomberg

• A SoHo BrewPub is Offering Free Beer For a Year If You Get its Logo Tattooed Gothamist

• The Art of Perfect Vibes: How NYC’s Hottest Restaurants Got That Way Bloomberg

The Deep Insight

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