Buying real estate makes people somewhat vulnerable. They have to make a multi-year, if not multi-decade, commitment to a property. They have numerous obligations as homeowners. They are also at risk of losing the property at any point until they pay off the mortgage in full.
Buyers technically have exposure even before they have an accepted offer. Every time they make an offer, they risk their earnest money. People attempting to buy real estate usually need to deposit at least 1% of the offered price in an escrow account. Buyers may want to add contingencies to their offers to protect themselves from the loss of their earnest money if they do not close on a property.
What are contentions?
Contingencies are clauses that make the completion of the transaction dependent on specific details. Contingencies typically address issues that could arise between the date of the offer and the date of the closing.
Frequently, buyers include inspection contingencies in their offers. If a professional inspector turns up major defects with the property, they can cancel the closing if the seller does not negotiate with them about the issue. Appraisal contingencies are also relatively common. If the appraisal comes in below the offered amount for the property, the buyer may be able to cancel the closing without penalties.
Buyers also include financing contentions. If they lose their job or otherwise have issues arise that prevent them from obtaining a mortgage, they can cancel the closing due to the lack of funding without losing their earnest money. They could even make the purchase contingent on the sale of their prior home.
Creating custom offer documents can help protect people from situations where they may lose the money they need to buy a home. Buyers who work with attorneys to craft custom documents and carefully evaluate purchase agreements before signing them can more effectively protect themselves and their resources during complex and unpredictable real estate transactions.
