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How does the water leak detector work? What's supposed to go onto those contacts?

Water.

It works by having water (or another conductive liquid) provide a path between the contacts.

Interesting, the terminals really look like those screw terminals you attach cables too.

I'm guessing they sell some kind of extension to attach to those terminals. For example, here's what the $12 water alarm in my basement looks like: https://www.amazon.com/Glentronics-Inc-BWD-HWA-00895001498-B...

Water