Buyers can cancel a contract and get their deposit back under certain common contingencies.
Ideally, once a purchase contract is drawn up both the buyer and seller will be happy with the deal and willing to move forward with the transaction. However, in some cases you do find buyers with a wandering eye who will make an offer on one property while still continuing to look for a better deal. I always recommend a good faith deposit of 3 percent of the sales price to help keep buyers honest. This deposit can only be returned under the buyer’s contingency provisions specified in the contract.
Here are some of the most common buyer’s contingencies included in a California real estate contract.
Property Condition Contingency
Home buyers have a right to learn all they can about the condition of the property before they buy it. This can include a standard home inspection as well as special inspections such as roof inspections, termite inspections, sewer inspections, and inspections for hazardous materials like lead paint, asbestos, radon, mold, etc. If a concern is discovered, the buyer can try to negotiate on price or request that the seller fix the problem before the sales goes through.
Loan Contingency
The loan contingency provision is typically linked to an appraisal contingency as well. Buyers need to get the property appraised in order to secure their loan. If the property appraises for less than the selling price, there will be a problem getting the loan. If this happens, or if the financing falls through for any other reason, the contact can be canceled under this contingency.
Title Contingency
Obviously the title to the property needs to be clean in order for it to change hands. The title contingency provides protection against the possibility of discovering any issues that affect ownership in the course of a title search. For example, maybe there is a third party with a lien or other ownership claim that could affect the sale.
In most cases, buyers have 17 days to exercise their right to cancel the contract based on these contingencies and recover their good faith deposit. However, we can negotiate a longer or shorter period as appropriate. For example, in this tough mortgage market many lenders are absolutely slammed with loan applications and it may take longer than normal for the buyer to receive loan approval. In this case we may be able to extend the loan contingency period. The periods can also be shortened to expedite an all-cash sale. A good real estate agent will monitor these factors closely to assure a swift closing.