The formal completion of a real estate transaction occurs at closing, but it is the earlier legal contract that stipulates the terms and conditions of the sale. Prospective home buyers can carefully draft a purchase offer so that potential impediments to the transaction are identified and addressed in the contract.

A sales contract becomes legally binding when both parties agree to the terms and sign the document. Contingency clauses in the contract define the various conditions that must be satisfied in order for the contract to continue in effect. Contingency clauses can be customized to apply to the specific property you are seeking to purchase.

Inspection Contingencies

Making your prospective home purchase contingent on an inspection allows you to look for physical defects in the property. Before signing a contract, determine how many days you need to perform a complete inspection. If a problem is found within that time frame, you are able to withdraw from the contract.

In addition to structural integrity, an inspection clause is likely to address potentially hidden problems such as mold or lead paint. Contingency clauses can also be included to require the successful completion of the following activities:

• A termite inspection
• Inspection of a water well system
• Sewer inspection

Financing contingencies

If you are not yet approved for a new mortgage, the purchase can be contingent on your ability to obtain financing with specific terms. You may have an upper limit on the interest rate that you are willing to pay on a mortgage. The seller's time is important, so contingency clauses must specify how long they are to remain in effect.

Appraisal Contingencies

Although a purchase price is agreed upon in the sales contract, there may be no recent appraisal of the true market value of the home. An appraisal contingency clause can include potential concessions by the seller if the property is appraised for less than the original contract price. A potential price reduction can also be contingent on other circumstances.

HOA and Cancelling or Proceeding with Your Offer

If the property is in a homeowners association, you may discover that the membership costs are higher than expected. After a close inspection of the guidelines of the homeowners association, you may decide not to proceed due to various restrictions on property use.

The treatment of your earnest money deposit is of concern to both buyer and seller. If you decide to cancel the contract, you can expect a return of your earnest money if the condition of each contingency is met within the specified time frame.

Once you submit a contract offer, the seller may make a counteroffer. The contract that you both eventually agree on may be a practical compromise. Contact a real estate attorney for more information on sales contracts and contingency clauses.