How to avoid a real estate purchase contract

It's a dirty secret in the world of real estate brokers. The buyer is king in the world of real estate, and the realtor's standard form reflects this reality--so much so, that it's hardly a contract.

Maybe the buyer has found a better deal down the street and wants to get out of a contract for what is now a lemon. What are the buyer's options? It boils down to two major exit strategies: the inspection contingency and the financing contingency.

Inspection contingency
Typically a standard form contract contains some kind of allowance for a buyer to conduct inspections, and an opportunity for the seller to cure any defects revealed by the inspection. The paragraph might look something like this:

INSPECTIONS. Purchaser, at Purchaser's expense, shall have the right until the later of days after Acceptance or until _____________, __20 ("Inspection Period") to obtain inspections of the Property. Purchaser is encouraged to obtain such inspections and is advised that inspections required by FHA, VA or lenders do not necessarily eliminate the need for other inspections. Items specifically disclosed in this Agreement and in the Residential Property Disclosure Form remain subject to Purchaser's inspection rights. The results of Purchaser’s inspections pursuant to this Paragraph 8 are subject to the satisfaction of the Purchaser. In the event Purchaser is not satisfied with the results of the inspections, Purchaser shall have the right to terminate this Agreement by notifying Seller in writing before the expiration of the Inspection Period of said dissatisfaction. In the event Purchaser is not satisfied with the results of the inspections but desires to attempt to negotiate a satisfactory resolution with the Seller to remedy the inspection issues, Purchaser and Seller shall have a period of five (5) days after receipt of written notice of dissatisfaction ("Remediation Period") to agree upon a remedy satisfactory to Purchaser and if no such remedy is agreed upon in writing, Purchaser shall have the right to terminate this Agreement by providing written notice to Seller no later than five (5) days after the end of the Remediation Period (the "Cancellation Period"). If Purchaser and Seller agree to remedy an unsatisfactory condition of the Property, it is agreed that the remedy shall be performed in a good and workmanlike manner prior to Closing and is subject to the reasonable satisfaction of Purchaser.

I'll save you the time of mucking through that whole paragraph and pull out only the important points:

 The results of Purchaser’s inspections pursuant to this Paragraph 8 are subject to the satisfaction of the Purchaser. In the event Purchaser is not satisfied with the results of the inspections, Purchaser shall have the right to terminate this Agreement by notifying Seller in writing before the expiration of the Inspection Period of said dissatisfaction. 

That's right. The inspection, and therefore the entire deal is contingent on the Purchaser's satisfaction. It doesn't hold the Purchaser to any standard of reasonableness at all--the Purchaser can simply state that he/she is not satisfied with the location of the property and that will be that. The seller can't remedy a badly located property by moving it. The deal is dead.

Financing contingency

This one is a little trickier. Generally if you want to finance a property through the bank or another lender, you get a certain allowable timeframe for obtaining a commitment to lend from the bank prior to closing. There's some wiggle room here to get out of the contract if you can't come up with the financing (of course if the bank refuses to lend then the deal is dead -- they're not going to make you pay with cash).

5. FINANCING. This Agreement ( ) is not ( ) is conditioned upon Purchaser securing a Conventional FHA VA Other (if Other is selected, write in type of loan) loan commitment within days (this provision is not applicable if the number of days is left blank) after Acceptance (the “Financing Contingency Period”). Purchaser shall pursue such loan in good faith and with reasonable diligence. If a loan commitment specific to the Property cannot be obtained by Purchaser, either party may terminate this Agreement by delivering written notice of termination to the other within three (3) days from the expiration of the Financing Contingency Period and the termination procedures of Paragraph 21 shall apply. If this Agreement is not terminated as provided in this Paragraph 5, Purchaser shall be deemed to have the ability to obtain the loan, this Agreement shall no longer be subject to this financing contingency, and the method of payment shall be deemed to be “all cash”.

Assuming the inspection contingency has expired, your failure to get a loan commitment from the bank will not be held against you if you pursued the loan in good faith and with reasonable diligence. It's not excusable that the bank rejected you because you didn't send in your tax returns. If you want to use this contingency to escape the contract, it will require a good relationship between you and the bank -- they're always looking for reasons to reject loans for riskiness and you have to give them one. Perhaps you have a major expense coming up that will impair your ability to repay the loan, or you disagree with the appraised value of the property. Proceed carefully here, because you need to make sure that the seller can't accuse you of failing to pursue the loan "in good faith and with reasonable diligence."