Contingencies
TLDR: Include contingencies to allow yourself to terminate the contract under certain circumstances without losing your earnest money deposit.
Contingencies in a contract are your escape clauses that allow you to walk away with your earnest money in hand. They anticipate scenarios that commonly impede closings, such as financing falling through or a low appraisal. Essentially, your offer is “contingent” upon certain circumstances. Below are some examples of contingencies you might include.
Financing Contingency
Allows you to cancel the contract if your financing falls through
Appraisal Contingency
Allows you to terminate the contract if the property doesn't appraise for at least the agreed upon sales price
Inspection Contingency
Enables you to back out of the contract if you and the seller can't come to an agreement about what repairs should be made or credited after receiving the inspection report
Radon Contingency
Ensures that radon levels are beneath the recommended limit or are mitigated to achieve such levels
Termite Contingency
Stipulates that the seller is responsible for mitigating and repairing damage caused by termites
You can think of these contingencies as protection and the game plan for common "What if" scenarios that may pan out. When you include contingencies in your offer to the seller, it means your offer is contingent upon meeting certain criteria. For example, if the inspection results show that the house has major structural damage, or if you are unable to secure financing, assuming you have inspection and financing contingencies in your contract, you’ll be allowed to walk away from the contract and receive your earnest money deposit back in full.
A Word to the Wise: The More Stipulations You Add, the Weaker Your Offer
While some contingencies are a must-have for almost every offer, keep in mind that the more contingencies you have in your offer, the less attractive your offer is to the seller. While you’re trying to add preventative measures in your offer, the seller is trying to sell the house, and putting it under contract for a few weeks only to discover you aren't approved for financing means that the seller has to put the house back on the market and start from square one. While you certainly want to avoid losing your earnest money deposit, many buyers end up having to forego contingencies in highly competitive markets.
A Word of Warning
Foregoing these contingencies is generally a bad idea unless you’re certain that these subjects don’t apply to you. Paying with cash? By all means, omit the financing contingency. However, if you omit the financing contingency when your offer depends on securing a loan and you’re denied, you’re likely to lose your earnest money deposit to the seller since you didn’t include the pertinent contingency.
How long do I have to decide whether to cancel the contract?
These contingencies will all have deadlines associated with them. The specific timeframes in which you have to complete the tasks in each contingency will vary depending on what you negotiate with the seller. It's worth noting that you can always walk away from a contract after you've signed and before you close, but you may lose your earnest money deposit if the termination doesn't fall within the criteria you've outlined in each contingency.
Not all Contingencies are Created Equal
An example of a contingency that might give a seller pause is the Sale of Other Property contingency. This contingency is included in an offer when the buyer wants to put in an offer on a house but needs to sell their existing property before they can close on the new house, usually because they need the cash for the down payment on the new house. This situation is risky to sellers because reliance on the timely sale of another property often results in many delays to closing.
Fun Fact
You can include a contingency for literally any reason. You could make the purchase of a house contingent upon the sky being purple on the day of closing, although it's not likely to be accepted by the seller. Contracts are simply agreements between two parties, and contingencies are stipulations of that agreement.