A common clause added to a purchase agreement that allows a buyer to back out of a deal without losing their EMD.
A contingency is a common clause added to a purchase agreement that allows a buyer to back out of a deal without forfeiting their earnest money deposit (or "EMD") to the seller.
Types of common contingencies are loan, appraisal, and inspection:
- A loan contingency expresses that the offer is contingent upon securing mortgage financing for the property.
- An appraisal contingency expresses that the offer is contingent upon review of a satisfactory appraisal report (i.e., one that determines a value above or equal to the purchase price, and without any major repairs called for).
- An inspection contingency expresses that the offer is contingent upon the buyer’s review of the inspection report(s). The inspection report(s) evaluate the overall condition of the property to inform the prospective buyer of any potential issues or concerns.
In their offer, the buyer will indicate which contingencies they will maintain and the duration (number of days) that they will leave each contingency in place for. For example: if the loan contingency is 10 days long, then the buyer has 10 days to secure formal loan approval and lift the contingency by day 10. Once the buyer removes all contingencies, they can no longer back out of the deal without the risk of forfeiting their EMD to the seller.
In competitive markets, it is common to see extremely short contingency periods or contingencies waived altogether. Please chat with both your Real Estate Agent and lender carefully about the implications of short or waived contingencies.