The information provided below is general in nature and thus, may not apply to your situation. Before relying on this information, you should consult with your legal and/or tax professional.

Normally the offer has at least two contingencies - the financing contingency and physical inspection contingency. Contingencies give one party the legal right to back out of a contract. During the time that the contingencies are in place, the contract is conditional and the seller cannot bank on the contract closing. During this time, however, the seller cannot accept another offer in primary position even if the price is higher than the conditional offer he has accepted. The seller may accept the new offer in back up position and if the contract in first position cancels, the back up moves into first position. It is, therefore, essential to carefully consider the market and the prospective offer before accepting any offer.

The parties must be very careful about insuring that the contingency deadlines are followed. The buyer must either terminate the contract during the contingency period or release the contingency by the end of the contingency period. Many contracts require the seller to give the buyer a 24-hour notice demanding release of contingencies before the contract lapses and the seller moves on to market the property for sale again.

Financing Contingency: Usually the Buyer needs a loan to purchase the property. If he cannot qualify, the financing contingency is the buyer's escape clause. Since the Seller ties up the property for the financing contingency period, waiting to see if the Buyer qualifies, the qualified buyer presents a pre-approval letter from his lender with his offer or within a very brief time after the offer is accepted. The pre-approval letter confirms that the lender has already qualified the buyer, and all that now needs qualification is the property itself by appraisal. In a seller's market, seller's want to make sure buyers are pre-approved. Make sure the wording of the lender letter is "pre-approved", not "pre-qualified". The latter means nothing. With pre-qualification the lender has not even confirmed the information provided by the buyer.

A typical financing contingency is 30 days. 21 days is considered a short loan approval period, but lenders can often meet this timeframe as long as the lending market is not over extended. The loan contingency should specifically describe the loan the buyer is seeking. In essence, the buyer is saying that if I get the loan I describe, my loan contingency will be considered met. Therefore, the seller should insure that the loan terms described by the buyer conforms to what the market will bear. For instance, buyer's loan contingency reads:

"This contract is contingent upon the buyer obtaining an 80% loan at a 7.5% fixed rate payable over 30 years, buyer to pay no more than one point in fees, within 30 days of acceptance of this contract."

Make sure that the buyer's pre-approval letter matches these terms. Since the buyer is already pre-approved for this loan, there is very little chance the transaction will fail to close because of loan approval. Of course, if the property fails to appraise at the purchase price, the loan will not receive full approval. But, other than that, there are few conditions that prevent full loan approval from being given when the buyer has been pre-approved.

Property Inspection Contingency: During the inspection contingency period, the buyer evaluates the physical condition of the property. During this time, the buyer receives and carefully reviews the seller's disclosures about the property's conditions and its history. The buyer also hires professionals to investigate the property. The typical inspections performed by the buyer are pest control (relates only to pest-related conditions) and home inspection (the condition of the property unrelated to pests). Other inspections the buyer may want to have performed are roof (the home inspection does not include roof inspection), mold, windows, siding, foundation, engineering. The extent of your inspection will naturally depend upon the characteristics of the property itself, the value of the property and your desire to be thorough.

Buyers should be present at their inspections in order to ask questions and make sure the inspector does not find an area to be "inaccessible." For instance, if an area has boxes or furniture in the way, the inspector will not inspect that area, instead listing it as "inaccessible". If you are present, with the seller's permission, areas that are inaccessible should be made accessible. It is often in these "inaccessible" areas where problems exist. There may be areas where some intrusion is required to investigate non-apparent conditions such as pests, mold, water entry, and the like. You and the seller should be on hand to authorize these intrusions.

The inspection contingency should be as short as possible since during this period the buyer may cancel the contract based on any physical condition of the property. Typically, a 14-day inspection period is given. If the buyer can show that he or she needs longer, the contingency may be extended.

Sellers should carefully read the contract provision relating to this contingency. Pest reports often break down defects into two categories - Section 1 defects (actual damage) and Section 2 defects (likely to lead to pest damage). Some contract have the seller agreeing in advance to pay for Section 1 defects. The seller probably wants to wait to see what the inspections say before agreeing to pay for any defects that are later discovered. Thus, if the contract includes this provision, the seller will generally want to remove it.

Contingent on Sale of Buyer's Home or Purchase of Seller's New Home: There is nothing more stressful than selling a home without a new home to move to or buying a home when you haven't sold your home. There are contingencies to cover these situations. Whether these contingencies will be accepted depend on the type of market that is present. In a strong seller's market, a seller will not accept an offer with a contingency that the buyer must first sell his or her home. In a strong buyer's market, the buyer will not allow the seller's contingency that a replacement home must be found before escrow can close.

The problem with this type of contingency is that once the seller accepts a contract, the property becomes less marketable in the multiple listings. It is then shown as a sale pending. Although it does show that it is subject to this type of contingency, the property nevertheless loses interest because of its status as pending. Because of this fact, the seller wants the contingency to be as short and as specific as possible.

The wording of these contingencies in most form contracts is not sufficient to cause the contingency to operate in the best manner to assure sale of the property. Many contracts provide that if the seller receives another offer he or she wants to accept, the buyer is given notice and must release the contingency within 72 hours to stay in contract. This provision is reasonable. The rest of the contingency should be as tight as possible. The contingency should state that within ____ days the buyer/seller must be in contract subject only to loan and inspection contingencies (and not subject to either party buying or selling properties), and removal of contingencies on the other sale to occur within 14 days thereafter for the physical inspection contingency and within 21 days thereafter for the loan contingency. It is only in this manner that the parties can best control their own sale process.

The information provided above is general in nature and thus, may not apply to your situation. Before relying on this information, you should consult with your legal and/or tax professional.