Protect Your Earnest Money With These Two Contingencies

17 May 2017
 Categories: Real Estate, Blog


When a seller accepts your offer on a home, you will be required to provide the person with earnest money. This deposit, typically equal to 1 to 2 percent of the purchase price, essentially signifies that you are serious about purchasing the house. If you fail to go through with the sale for any reason except those outlined in the contract, the seller gets to keep your earnest money. Here are two contingencies you should put in the sale contract that can help ensure you get your deposit back if something goes awry.

Appraisal Contingency

Most homes for sale are priced close to their market value, and sometimes slightly higher to allow for room for negotiations. In some cases, though, the market value of the home is significantly less than the asking price, and you won't find out about this discrepancy until the home is appraised. This isn't always the seller's fault. The seller may honestly believe the home is worth the asking price, but a major issue with the house (e.g., polluted soil) dragged down its value.

Regardless of why the home is worth less than the sale price, the problem in this scenario is htat the lender will typically only write the loan for the appraised amount. This can leave you scrambling to come up with the difference if the seller refuses to lower the asking price to match the appraisal.

Putting in an appraisal contingency that states you will wait to see what the home is worth before fully agreeing to pay for it can provide an out for you that lets you escape the situation and keep your earnest money. Additionally, the seller may suddenly become more amendable to negotiating on the price if it appears you will pull out of the sale.

Renovation/Building Contingency

This may seem like an odd contingency to put into a contract, but it's necessary if you're purchasing a brand-new home from a builder or if the homeowner is doing some (or promises to do) renovations on the home while trying to sell it. The purpose of this contingency is to protect you if the builder or homeowner doesn't complete the work as agreed or to the level of quality required.

For example, take a case where the homeowner promises to swap out the kitchen cabinets by a certain date, but that date passes and the work still hasn't been done. A renovation contingency would allow you to back out of the sale without losing your earnest money, which you may want to do if it appears the seller is trying to pull a fast one. Typically, the threat of losing the sale will motivate the seller to get the work done to avoid this eventuality.

For more information about contingencies you should put in your sale contract or for help with finding a home that's right for you, contact a real estate agent.