The main issue many people focus on when looking to buy residential real estate is price. They try to qualify for the biggest mortgage they can. They may also open with their highest and best offer when they find their dream home.
Another way that real estate agents sometimes encourage buyers to make their offers more competitive is by foregoing the inclusion of any contingencies when submitting the offer. However, contingencies are one of the most valuable contract terms for those hoping to buy real property.
What does a contingency actually do to protect those seeking to purchase residential real estate?
Contingencies protect earnest money
Buyers need sellers to trust that they intend to complete the transaction. Earnest money is a standard part of most real estate transactions. The funds the buyer deposits after making an offer represent their sincere intention to complete the transaction.
Typically, earnest money is usually at least 1% of the offered price for the property. However, buyers trying to compete for a popular property in a high-demand area might offer more in earnest money to stand out from others looking at the same home.
Those funds might make up a good portion or all of the down payment necessary to secure financing for the transaction. Therefore, the loss of those funds could be a devastating setback for someone trying to purchase a home.
Losing that money is exactly what might happen if the buyer cancels the closing. The seller can retain some or all of the earnest money to compensate them for the inconvenience and expense involved in a canceled real estate transaction. Contingencies are how buyers avoid overextending themselves and getting trapped in a scenario where they must purchase a property that doesn’t really fit their needs.
Contingencies provide an exit clause when making an offer. If certain circumstances arise, contingencies give buyers away to retain their earnest money and cancel the transaction.
Contingencies limit buyer exposure
Making an offer on a property before there has been a professional inspection or a survey of the land can be dangerous. Issues can come to light later that make it clear the transaction is not beneficial for the buyer or that the price is far too high given the condition of the home.
Contingencies can protect buyers from choosing between a bad purchase and the loss of earnest money if there are inspection or survey issues. Contingencies related to the appraisal and the availability of financing are also popular inclusions.
Talking about a real estate transaction with a skilled legal team can help buyers determine what contingencies they may need to include in an offer. The creation of custom closing documents can go a long way toward protecting those who want to invest in residential real estate.