3 Contract Clauses That Protect Your Deposit

Learn about the real estate contract clauses that protect your deposit.

One of the most common concerns buyers have when purchasing a home is the security of their good faith deposit. Specifically, they want to know what happens if something goes wrong after they've made an offer—how is their deposit protected, and at what point might they lose it?

In real estate transactions, these concerns are addressed through what are commonly referred to as the "Three Outs" in a contract. These outs are standard contingencies that protect the buyer, ensuring they have specific exit points during the process without forfeiting their deposit. Let’s define these three contingencies.

1. Inspection contingency. The inspection contingency is one of the broadest and most critical protections for a buyer. It allows the buyer to investigate the property thoroughly, not just in terms of its physical condition but also regarding other factors like neighborhood safety, local schools, and any other aspect of the property or area that might be of concern. Suppose the buyer finds anything unsatisfactory during this period. In that case, they can cancel the contract by submitting a cancellation notice in writing, and their good faith deposit will be returned in full.

2. Appraisal contingency. The appraisal contingency ensures that the property is valued at or above the purchase price agreed upon in the contract. If the appraisal is lower than the offer price, the buyer can renegotiate with the seller. If an agreement isn't reached, the buyer can cancel the contract using the appraisal contingency, and the deposit will be refunded. This protection is crucial in preventing buyers from overpaying for a property.

3. Loan contingency. The loan contingency is the final safeguard for the buyer. It stipulates that the sale is contingent upon the buyer securing the necessary financing for the purchase. Even if the buyer has been pre-approved, the loan must be officially approved by the lender, which includes the appraisal being at or above the contract price and all other financial requirements being met. If the buyer cannot obtain financing, they can invoke the loan contingency to exit the contract without losing their deposit.

"Protect your investment with the Three Outs: Inspection, Appraisal, and Loan contingencies."

These contingencies typically operate on different timelines but often overlap. For instance, you might have a ten-day inspection contingency, followed by an appraisal contingency, and a loan contingency. If the specified timeline for a contingency passes without action, the contract doesn’t automatically "explode." Instead, it generally extends unless the seller chooses to enforce the deadline strictly.

It’s also important to note that the customs surrounding contingencies can vary by region. For example, in high-demand markets like San Francisco, it’s common for sellers to complete all inspections and provide full disclosure before the property even hits the market. Buyers are often expected to review all information and make an offer without contingencies. However, in other areas, like Sacramento, it’s typical for buyers to include all three contingencies in their offers.

As the real estate market fluctuates, the prevalence of certain contingencies may change. For instance, during the high-demand market of 2020 and 2021, buyers were often pressured to waive contingencies to secure a property. But as the market normalizes, these protections are becoming more common once again.

If you're looking through the Sacramento real estate market or considering buying a home, I'd love to be your resource. Let’s connect and ensure your next real estate transaction is secure and successful. Call me at 916-847-2205. I look forward to hearing from you!