Making an offer to purchase residential real estate is complex. Buyers typically submit a multi-page document with a variety of specific terms. They offer a specific price and may propose a timeline for assuming possession of the property.
In many cases, the offers that buyers make also include several contingencies. Some buyers forgo contingencies to make their offers more attractive to sellers. Others prioritize their own protection over making a competitive offer.
Both buyers looking to acquire real property and sellers listing their homes for sale need to understand contingencies to effectively navigate residential real estate transactions. What purpose do these contract inclusions serve?
Contingencies protect earnest money
It takes weeks to close on residential real estate. Buyers make an offer, and sellers may counter the terms that they propose. The lengthy timeline means that sellers are at risk of significant financial setbacks if buyers back out at the 11th hour.
Sellers who accept offers have a lot to lose if the buyers cancel right before closing. Earnest money serves as a form of protection against the financial hardship caused by a canceled closing. Buyers typically deposit earnest money as a means of showing their sincerity.
Earnest money is usually at least 1% of the amount offered for the property, if not far more than that. These funds usually apply toward the buyer’s down payment. However, if they cancel the closing, the seller can retain the earnest money as compensation for their expenses.
Contingencies added to an offer or purchase agreement serve as a way to cancel the closing without violating the contract. These clauses effectively protect the buyer’s earnest money by providing valid reasons to cancel the closing without penalties.
Buyers may include contingencies related to inspections in case there are undisclosed property defects. They may include appraisal and financing contingencies in case there are issues with property value or the mortgage. The goal is to ensure that if they have to cancel due to factors outside of their control, they do not risk the loss of their earnest money.
Having support when drafting real estate documents or reviewing offers can help protect people from financial losses and other setbacks. Contingencies may influence whether a seller accepts an offer and how much exposure buyers have during the closing process.