TLDR: Contingencies are clauses for anticipated circumstances that might cause a buyer to be unwilling or unable to purchase the property. If the buyer terminates the contract for a reason stipulated in a contingency, their EMD will be returned to them. 

A contingency is a reason a buyer might want to opt out of the contract and still have their earnest money returned to them. You can think of a contingency as having a doctor's note in school–it's a legitimate reason to excuse yourself from the purchase. Some of the contingencies a buyer might include are: 

Financing Contingency

Allows the buyer to cancel the contract if their financing falls through

Appraisal Contingency

Allows the buyer to terminate the contract if the property doesn't appraise for at least the agreed upon sales price

Inspection Contingency

Enables the buyer to back out of the contract if you both can't come to an agreement about what repairs should be made or credited after receiving the inspection report

Radon Contingency

Ensures that radon levels are beneath the recommended limit or are mitigated to achieve such levels

Termite Contingency

Stipulates that the seller is responsible for mitigating and repairing damage caused by termites

It's worth explicitly stating that the more contingencies a buyer includes, the less likely it is that you'll be able to keep the earnest money deposit if they back out. If that wasn't clear enough, we'll spell it out: the more contingencies, the worse an offer typically is. 

What circumstances warrant contingencies?

Buyers will typically include contingencies if they need financing to afford the property, want to have the property inspected before committing to the purchase, or need to sell their property in order to buy yours. If your property is part of an HOA or Condo Association, some states require that a disclosure be included so the buyer can review the rules and regulations before committing to the sale. 

How long does the buyer have to decide whether to cancel the contract?

It depends on the contingency or disclosure and the timeline agreed upon in the contract. For instance, most HOA or Condo Association disclosures mandate that the buyer has 3 days to review the rules and regulations and decide if they want to continue with the sale. Inspection contingencies typically give the buyer a week or two to get the inspection done, and once they send you a list of requested repairs/credits, you’ll have three days to come to an agreement or lose the sale. If the buyer’s loan falls through, they can either cancel then or try to work out a new timeline with you in which they can find alternate funding.