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You can protect your earnest money with contingencies

On Behalf of | Feb 9, 2022 | Real Estate Law

Buyers take some risks when they make an offer on a property. They need their offer to be attractive, so they may offer the maximum amount that can possibly finance. When they make the offer, they authorize their real estate agent to promise earnest money to the seller if they accept the offer.

Earnest money is usually at least 1% of a property price. On a competitive market, people may offer 5% or even more in earnest money to convince the seller that they mean business. Unfortunately, if something happens between when you make the offer and when you sign the closing paperwork, your earnest money could be at risk.

The seller can keep that money if you walk away from the closing without a valid reason. Including contingencies in your offer helps protect those funds.

What contingencies do buyers use?

Contingencies are conditions that eliminate your obligation to follow through with the purchase. Some of the most common contingencies have to do with the value or condition of the property.

Appraisal contingencies require that the home appraises at a certain value for the closing to occur, while an inspection contingency will permit a buyer to back out of the closing if an inspector notices any significant defect with the property.

Financing contingencies are also useful, as the buyer’s situation could change after making the offer. Losing a job could mean that you no longer qualify for a mortgage, so a financing contingency protects you in that situation. Sale contingencies are also popular. If a seller needs to list and sell their own home, they may include restrictions on the purchase offer in the event that they cannot sell their home for the price they need to buy the property.

Contingencies may make your offer less attractive

The only negative aspect of a contingency is that it may make your offer less competitive. What a seller looks over multiple offers, price is a major factor, but so are the terms offered.

More contingencies mean more potential for something to go wrong. Sellers may choose offers with fewer contingencies or more specific contingencies so that they aren’t at risk of the closing falling through and needing to start the entire sale process over again.

Learning more about the risks involved in buying real estate can help you protect yourself when making an offer on a property.