A contingency is a standardized legal escape clause which foresees the possibility of an impediment to the consummation of the proposed sale. In essence it says the following: It is not expected, but should such and such occur (for example, conflagration of the property), or in case such and such should not occur (approval of a loan for instance), this agreement is cancelled, the contract becomes null and void, and all earnest monies are to be immediately refunded. So, should the prospective purchaser depend upon a loan for procurement of the property and yet it turns out is unable to obtain a loan commitment from the institution he chooses to apply at, or should the seller s property not qualify due to failed inspection contingency by either agents of the lender or buyer, then the contingency conditions are thereby met.

However, if either the buyer or the seller breach the agreement between them by backing out of the contract, and there are no contingency clauses which provide legal right for them to do so, there may be legal ramifications. For the seller, the earnest money may be forfeited and for the buyer other remedies are possible.

Most every contract is written and presented subject to some contingencies, although the seller does need to make sure that the contingency is inserted in good faith and not as a ploy to back out of the contract at any time. Here are some things to check before signing the purchase agreement.

If there is a contingency regarding the buyer s approval for a loan, insist on adding a time limit. If the buyer never asks for a loan, it cannot be approved, and this technicality could be enough for them to escape the contract unharmed, after great time cost to you. Most mortgage companies can give an approval in less than ten days, let alone a month, so putting a time limit will protect you from the buyers indecisiveness, while not injuring the sincere buyer. Also, you might want to consider having the buyer specify what interest rate and type of loan they are wanting so that you can judge whether they are or are not likely to be approved for the loan.

If the buyer wants a contingency that requires the sale of their house, make sure you add a time limit for the sale for the house. It is also advisable that you add a contingency of your own, that allows you to keep showing your house to other potential buyers, although there have to be a contingency in any ensuing offer that requires the former to fall through before it is ratified, but you can also state that if you do have another eligible offer, the original buyer has a time limit to move ahead with the offer or drop the deal, in which case you would be free to continue pursuing the second deal.

Although the buyer should be allowed the option of backing out if a serious defect is found, it does not necessarily follow that the seller should be forced to concede a complete loss due to faulty wording of the purchase agreement. How can the seller protect himself while still ensuring that the buyer is protected?

First of all, a time limit should be inserted, not only for the length of time allowable for the inspection to be completed, but also for the length of time allowed for the buyer to deliberating purchase approval. While this is not fail-safe, it does at least ensure that your house will not be tied up interminably.

Also, make sure that the contingency specifies that the buyer can only balk if presented with a new and major defect. If you have done your job in disclosing, this should protect you somewhat. Although the term major defect is open for interpretation, it might at least hinder the buyers from walking away if the defect in question is extremely trivial.

Do not accept a contingency that depends on the approval of a third party. This can cause serious problems, especially if you have not restricted them with a time limit for getting this approval. They may even have inserted this for the sole purpose of creating a loophole. If they third party is never consulted, approval can, technically, never be given, thus the buyer can walk.

However, if you feel that the buyer is asking in good faith, give them a couple of days to seek this approval, but make sure the time is very limited. If they are interested, they will talk to the party in question immediately. In this day of cell phones, they may be speaking to them before they leave your driveway!

It is not advisable to let the buyer take possession of the property until after closing. If it should fall through, they are now your tenants, though without a rental contract and eviction is a costly process, not to mention the damage they could do to the house before you can get them out.

When signing a purchase agreement, make sure you understand everything that is stated, and that everything that is agreed to by both parties, is VERY clearly stated. Leave nothing open to interpretation, or at least only those things which must be. It is advisable to have an attorney word the contract. Many deals that seem airtight start to leak when taken into a court of law.

Even if refusing some of the contingency requests seems a bit harsh, remember that you have the investment of your house at stake and the buyer has, normally, only $500 to $700 earnest money. Demand a contract that will not allow your hands to be legally tied.