Contract Contingencies Protect Your Deposit

When you submit an offer for a property, your contract will most likely have some contingencies, which are conditions of the sale. These contingencies exist to ultimately protect your good faith deposit in the event that you discover, for example, unacceptable property issues, end up with an appraised value that is less than the amount you’re offering, or suddenly can’t obtain financing.

But let’s back up. In a San Francisco purchase, it’s required to include a deposit equal to three percent of your purchase price. If your offer is accepted, you transfer that money via a wire or check into an escrow account held by a title company. In the event you back out of the sale for a reason other than a specified contingency, the seller is technically entitled to retain that deposit for what is called “liquidated damages.”

The primary contingencies in the purchase agreement are typically that of the inspection, appraisal and loan. If you include these conditions and decide to back out due to one or more of them, the sale will be cancelled and the deposit rightfully returned.

Many buyers are waiving these major contingencies in the current market in order to be competitive. If they’re doing that, it means that they hopefully fully understand that they need to be comfortable absorbing costs and repairs that may come up unexpectedly in the absence of inspections. Or they are extremely confident in their financing and have no doubt they will obtain their loan. (These buyers typically have much more than 20% down.) And finally, if their appraisal comes up short for the value they’re paying, they are ok covering the difference between the purchase price and appraised value.

If you’re not quite confident in all of that, it’s best to include the standard contingencies. Three percent of the price of any San Francisco home is a hefty amount, and you won’t be happy potentially losing it to a seller who seeks damages due to a sale cancellation.

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