Real Estate Contingencies - Your Escrow Safety Net

Contingencies are one of the key elements of any escrow.  Contingencies are a buyer's protection against losing your earnest money deposit that is usually required to open escrow.   An earnest money deposit should 3% of the purchase price. In a typical San Diego real estate transaction, buyers are given 17 days to remove their contingencies, though the amount of time allotted for contingencies is fully negotiable and can be any amount of time that the buyer and seller agree to.

I find that client's number one worry when in escrow is to protect their deposit until they are sure that they want to go through with the purchase and they have the financing in place.  It has become obvious to me that many people don't quite understand how and when their contingencies are removed.  The most si-highlight--primary thing to keep in mind is that real estate contingencies are actively removed.  This means that you actually have to sign them away.  Until you do this your money is never at risk.

Now let's assume that you are in escrow and have seventeen days to remove contingencies.  However, you fall asleep at the wheel, your agent falls asleep at the wheel (which if you hire me won't happen), and the 17th day comes around and you never removed them nor asked for an extension.  Don't sweat.  Most people become worried that at this point they have lost their protection of their earnest money deposit.  However, what they have forgotten is that contingencies are not passively removed.

They don't ever go away until you actually physically sign that you are removing them.  Yes, in this example you would certainly be violation of your escrow terms, but the seller's only recourse is to exercise their notice to perform, which is set at 24 hours by default but can also be negotiated to any length of time.  Here most people again assume that if they do not perform in those 24 hours that they will lose their earnest money deposit deposit.  This is not true.  If the buyer does not perform in the time set forth by the notice to perform, the seller's only recourse is to cancel escrow, but the earnest money deposit would stay with the buyer because they never signed away their contingencies.

If you take nothing else from this post, just remember that you will never be surprised one morning to find out that your contingencies have disappeared because you actually will have had to sign them away yourself.  This means that unless you just had too many drinks and can't remember what happened the day before, you will know when they are removed because you will physically do it yourself by signing a  document.

Now, this only applies to a standard California purchase that is executed using the California Purchase Agreement that is put together by the California Association of Realtors.  If you are using a different contract there may be different rules that apply according to the legal language of that contract.  Also, it is si-highlight--primary to be aware that if you trying to buy San Diego foreclosures for sale, most of the time the bank will counter with their own contract and they will make your contingencies passive.  This means that if you are not on your toes you may wake up to find them gone.  If you have any confusion as to what kind of deal you are in just ask your real estate agent.

What Is Covered Under Buyer Contingencies?

Buyers also want to know what their contingencies can be used for so they can get out of escrow without any loss, should they have to.  The answer is anything!  That's right....anything.  Or maybe I should say virtually anything.  Yes, some contingencies are for very specific things such as the loan and appraisal.

However, there is also one big vague contingency that covers buyers in nearly any aspect imaginable.  It is the buyer's investigation contingency.  Basically, it allows a buyer to investigate the property, conduct inspections, observe it at different times of day and night, read HOA documents, talk to the neighbors, and become comfortable with every aspect of the home before they put their earnest money deposit at risk.

This means that a perfectly legit reason for canceling escrow could be that you, the home buyer, realized that you don't like the way the sun hits the home at noon.  Or you just are not comfortable with an aspect of the HOA documents.  Maybe you are unhappy with something the inspector found.  Or perhaps you think it smells funny near the back of the home.  Who is to judge what smells funny to you or how the sun should hit a home at noon?  Who is to say what should be acceptable to you in the HOA docs?  Only you can judge that and the buyer investigation period will cover you in virtually any reason you want to have to cancel escrow.