Purchasing real property is a lengthy and complex process. Buyers have to identify properties that might fit their needs. They have to review listing documents, tour the homes that seem appropriate and make an offer to the seller when they want to buy.
Even after the seller accepts their offer, there may still be many steps left to complete before the sale is official. Buyers often come to the table very eager to get the sellers to accept their offer. They may make a generous offer in the hopes of attracting the seller’s interest. They may also fine-tune the terms of the offer to make it more attractive.
Buyers might choose not to include contingencies as a way of indicating their sincere desire to purchase a property. The decision not to include contingencies in an offer can appeal to a seller, but it can also leave the buyers in a vulnerable position.
What do contingencies do?
Contingencies are essentially escape clauses built into an offer. After a seller accepts an offer, both parties are legally bound to complete the transaction. Buyers who cancel a closing are at risk of losing their earnest money. Earnest money usually consists of at least 1%, if not 3% or more, of the purchase price offered by the buyer.
If the buyer frivolously cancels the closing, their decision could have a major negative impact on the seller. The earnest money serves as a form of security for the seller. They can retain some or all of the earnest money if the buyer cancels the transaction and forces them to relist the property.
Losing thousands of dollars can be a major setback for those hoping to purchase real estate. Contingencies help protect against that loss by allowing the buyer to cancel the closing without penalties. Many situations outside of the buyer’s control might lead to them choosing to cancel the closing.
One of the buyers might lose their job, leaving them unable to obtain a mortgage despite having pre-approval at the time when they made the offer. The inspection might turn up major property defects that make the buyer reconsider the price they offered or decide that the property does not suit their needs at all. Appraisal gaps can also raise questions about the value of the property and create financing issues.
Contingencies create legal protection for buyers who have to cancel a closing due to factors outside of their control. When buyers forgo contingencies, they leave their earnest money at risk and may end up feeling compelled to move forward with a transaction that no longer seems to be in their best interests.
Learning more about the nuances of real estate transactions and contracts can be beneficial for buyers and sellers. Those who have an attorney representing them can reduce the risk inherent in these life-altering transactions.
