As someone attempting to purchase real estate, one of the first steps in the process is the submission of an offer. There is a lot at risk when you submit an offer. Perhaps most obviously, there’s the possibility that your circumstances might change, forcing you to back out of the closing.
Typically, you need to make an offer with earnest money attached to show the seller that you intend to follow through with the purchase. If you cancel the closing, you are at risk of losing that earnest money. Including the three popular contingency clauses below could protect your earnest money.
An appraisal contingency
As property values increase, lenders have to look carefully at whether the growth is actually sustainable. For some markets, the prices offered for homes will far exceed their realistic fair market value. Including an appraisal contingency allows you to back out of a transaction if the appraisal comes in under the amount you offered.
An inspection contingency
Even if the appraisal turned out okay, you could face a real dilemma if the inspector finds expensive-to-fix issues with the property. You might have to absorb a $10,000 project unless you include an inspection contingency with your offer.
A home sale contingency
You can make the final closing contingent on your ability to sell your own home. The chances are good that you need some of the accrued equity from your home to cover the purchase price of the new property. If you can’t sell the home in time or for the amount you need, a contingency can allow you to cancel the closing.
Thinking about how to best protect yourself can take some of the financial risks out of a real estate transaction.
