As a buyer in a competitive market like the Bay Area, you want to do everything you can to make your offer the most compelling. One of the best ways to do that is to write what is often referred to as a “clean offer,” or an offer without contingencies.

Contingencies are clauses that define conditions that must be satisfied before a contract is binding. If the condition is not met, the buyer can exit the contract. The three most common contingencies are:

• Financing: The buyer must procure a loan of certain terms.

• Appraisal: The property must appraise for equal to or higher than the buyer’s offer amount.

• Inspection: A buyer can inspect the property to their satisfaction. This can be any type of inspection such as roof, structural, survey, pool, and so on. If anything is discovered to change their desirability for the property, they can exit the contract.

Other contingencies can be added by the buyer for any reason. For example, if a buyer must complete the sale of an existing property in order to have the capital necessary to purchase a property, they may include a contingency to that effect.

Contingencies protect buyers in that they allow ways for them to exit a contract. However, in a competitive market, sellers are more likely to look favorably on offers that have few or no contingencies, as they present a less risky, or cleaner, path to completing the sale. It is in the seller’s best interest to make sure their property does not fall out of contract, which would likely require it going back on the market.

Writing a clean, or non-contingent, offer does present potential risks for the buyer. If you go into contract, and then are unable to fulfill the financing requirements, or discover something about the property that might make you change your mind, you have no recourse. If you have to break the contract, you risk losing your Earnest Money Deposit (EMD), which establishes good faith at the time the contract was entered. This is typically 3% of the offer price, which is no small matter when it comes to San Francisco prices.

So if you want to write a clean offer, you want to make sure your situation merits an ability to waive the conditions:

• Financing: If you’re paying all cash, then there’s no need for this condition. Alternatively, if you are financing, make sure you are fully underwritten for the purchase amount by your lender — NOT just pre-approved. This means the lender has reviewed your file and is committed to lending you the amount being bid. Pre-approval is merely a high-level estimation of your buying power, and does not guarantee this.

• Appraisal: Sometimes it’s worth bidding high if a property has a great deal of interest and you want to stand out above other buyers. This increases potential for the appraised value coming in under purchase price. If you’re a cash buyer, there’s nothing to worry about — you have the funds to cover the purchase at the price you set. If you are financing, depending on the terms of your loan, you may have to come up with additional funds for the down payment to bridge the gap so that the loan amount equals the defined percentage of the appraised value (as oppose to purchase price), commonly 80%. For example, if you put down $200,000 on a $1 million house, and it appraises at $900,000, the bank might only lend 80% of the appraised value, or $720,000. This means you would have to produce an additional $80,000 in order to cover the delta and meet the purchase price. If you’re going to waive appraisal, make sure you are prepared for that possibility.

• Inspection: In many parts of the country, inspections are not done until a property is in contract. In San Francisco, it is far more common practice to do the inspections ahead of time, so the disclosures are as thorough as possible. This mitigates risk on the part of the seller, since it minimizes the chances of new material discoveries.

Any time you enter a contract, it’s important to understand the commitments and risks involved. We frequently write clean offers for our clients, but only after we have discussed the property at length and the risks.