From Elizabeth Weintraub,
Your Guide to Home Buying / Selling.
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I tell all home buyers that they can cancel a signed contract. Other agents look at me aghast, like, "What, are you crazy? Why would you tell buyers they can walk away?" Because buyers can. And because buyers have a right to know that fact. Most contracts contain contingencies. Until those contingencies are released, buyers can walk.

Once contingencies are written into a purchase contract, the contract must also specify how a contingency will be satisfied, released or removed from the contract. I will talk about how contingencies are released in California -- because many states follow similar contract law -- but be aware that your state may differ. For more information, read your contract, yes, all 15 million pages.

Releasing Home Buying Contingencies

• Releasing Appraisal Contingency.
  Standard California Association of Realtor (C.A.R.) purchase contracts, by default, give a buyer 17 days to release an appraisal contingency. That time frame can be extended or shortened in the contract. At the end of that time, if the buyer has not signed a release of contingencies, the seller can cancel the contract, after delivering to the buyer a Request for Buyer to Perform, giving the buyer 24 to 72 hours, typically, to perform.

  Buyers have options if a low appraisal was received.

• Releasing Loan Contingency.
  Standard California Association of Realtor purchase contracts, by default, give a buyer 17 days to release a loan contingency. That time frame can be shortened or run to the close of escrow in the contract. At the end of that time, if the buyer has not signed a release of contingencies, the seller can cancel the contract, after delivering to the buyer a Request for Buyer to Perform, giving the buyer 24 to 72 hours, typically, to perform.

  If the loan contingency is in place until the close of escrow, the buyer can walk away from the contract on the day it closes, if the loan has been denied.

• Releasing Contingencies for Other Inspections and Conditions of Title.
  With the exception of lead-based paint, C.A.R. contracts, by default, give buyers 17 days to complete all other inspections, including a home inspection. That time frame can be shortened or extended in the contract. At the end of that time, if the buyer has not signed a release of contingencies, the seller can cancel the contract after delivering to the buyer a Request for Buyer to Perform, giving the buyer 24 to 72 hours, typically, to perform.

  It's not unusual for buyers who are buying land to ask for a contingency to obtain a permit for the right to build. Other home buyers might make a contract contingent on being able to put in a swimming pool. These contingencies should contain a time frame or action that is expected by the buyer to release the contingencies.

  If the buyer has found deficiencies in the home inspection report such as a wet basement, dead squirrels in the attic, loss of structural integrity, or health and safety issues, a buyer may issue a Request for Repair to the seller. The seller is not obligated to honor the Request for Repair and may, at the seller's discretion, refuse. In that event, the buyer is entitled to cancel the transaction, renegotiate a mutually acceptable alternative or simply move forward.

• Releasing Contingency to Sell
  Sometimes, buyers want to buy a home before selling an existing home. In that event, they offer to buy the seller's home providing they can sell their own home within a certain time period. Most sellers, if they accept an offer contingent on selling, will agree to give the buyer a first right of refusal period if, and when, the sellers receive another offer.

  If the sellers receive another offer and issue a Request for Buyer to Perform, the buyers can either cancel the transaction or remove the contingency to sell.

When Buyers Refuse to Sign a Release of Contingencies

In C.A.R. contracts, if the buyer does not sign a release of contingencies within the specified time period, it is up to the seller to demand that the buyer perform. If the seller does not demand performance, the contingencies stay in place and do not expire. Not all sellers demand performance, and many real estate agents neglect to monitor contingencies.

After a buyer has released all the contingencies in the contract, the buyer is obligated to move forward with the purchase. If the buyer decides to cancel the contract, after signing a release of contingencies, the seller has the right to demand the buyer's earnest money deposit and may be entitled to liquidated damages.

If the parties cannot agree to the disposition of the earnest money deposit, the seller and buyer will need to settle the dispute, either through arbitration or by filing a lawsuit, depending on the language in the contract. For more information, consult a real estate lawyer.