The term "contingency" refers to provisions in the purchase agreement which allow the buyer to back out for any one of three reasons. In reality, buyers also use the contigency period as a safety net so they can back out if things don't go as planned once escrow is opened.
There are three formal contingencies which must be removed by the buyer within the timeframe setforth in the purchase agreement. If they are not removed by the deadline, the listing agent has the right to send to the buyers' agent what's known as a "24 hr notice to perform" which will ask that the contingencies be formally removed witin the next 24 hrs. If the buyer doesn't sign off on the contingencies by the next day, the seller has the right to cancel the contract. The three areas that contingencies relate to are as follows:
Inspection: This contingency allows for a period of time in which the buyer can perform any type of inspection they desire on the property(at the buyers' expense), as well as verify that the property is insurable. California is currently experiencing some real problems with insurance, if there have been any insurance claims on the property during the last five years it could make it difficult to get insurance. In some cases, there is a home inspection also available for the buyer to review. However this does not prevent the buyer from obtaining their own inspections as well. It is recommended that a buyer obtain a home inspection on the property if there is not one currently available. This home inspection will outline the condition of the property and reveal any problems with it. The inspection should be performed by an insured, and experienced inspector. After reviewing the report, the buyer can make an informed decision about whether or not they want to poceed with the purchase.
Loan: This allows for the buyer to verify that they have financing in place to go forward with the deal. Even if the buyer was pre-approved when the offer was submitted, there are issues that can sometimes arise that can prevent the buyer from getting financing after they have opened escrow.
Appraisal: This contingency allows for the buyer's lender to perform an appraisal on the property to verify that the value of the property is at least equal to the loan amount. If the property does not appraise for at least the amount of the loan, the lender will not finance the buyer.
Usually the time frame for removing all contingencies is no more than one or two weeks at most, seven to ten days is common. The important thing to remember about contingencies is that up until the buyer removes all of them, the buyer can walk away from the deal. However once the buyer removes all contingencies, he or she can lose the intial deposit that was used to open the escrow if they dont follow through with the deal. This is meant to protect the buyers right to back out until they are certain that they are satisfied with the condition of the property as well as their ability to obtain the necessary financing to close the deal. However, it also allows for the seller to be compensated in some way for the lost time if the buyer fails to close after they remove contingencies.