Question: We have been trying to sell our condominium unit for several months, and finally our real estate agent presented us with a contract. Although the price was lower than we were hoping to get, we decided to accept that offer.

In reliance on that transaction, we entered into a contract to buy another property. Our buyer had a contingency for a home inspection, which was done to his satisfaction. He specifically advised our agent that he was removing the contingency.

A few days later, we learned from our agent that the earnest money deposit was returned by the bank for "insufficient funds." There is another person who has now expressed interest in our condominium unit, and has presented us with an offer which is at a higher price.

What can we do?

Answer: Your agent must immediately advise the buyer about his bounced check and give him five business days to make it good. The agent should advise that buyer that if this is not done, he will be in default and that you will sell the property to the third party,.

If that third party offer is acceptable, you should sign it, but make it clear that this is a backup contract. You -- or your agent -- should advise the third party of all of the facts, since full disclosure will avoid any future litigation.

You should consider using this language:

BACK UP CONTRACT: This contract is a first back-up to a contract dated ______. This contract shall become the primary contract immediately upon delivery of notice from the Seller that the other contract is void. The rights and obligations of the parties under the primary contract are superior to the rights and obligations of this back-up contract.

At the present time, the first contract is technically in breach. That contract required the buyer to post good funds as the earnest money deposit, and obviously the funds are not there. However, it would be unfair for you to unilaterally terminate that contract, without providing that buyer the opportunity to cure the default.

It may be that it was an honest mistake. It is also possible that the bank made an error (it does happen once in a while). Or it may be that the buyer just had cold feet and arranged to have no money in his checking account.

But regardless of the reason, you must advise that buyer of the problem and give him the right to make his check good. Otherwise, you could find yourself in nasty litigation.

Let me pose a follow-up question. What if that buyer takes no action to redeem the check, but refuses to sign a release? Can you sell the unit to the third party?

Here is where brokers and attorneys often differ. The real estate industry takes the position that a release is mandatory. Lawyers will often allow the sale, depending on the facts and circumstances of each case.

If the first buyer has been given adequate notice and an opportunity to cure, and if the buyer has not filed a lawsuit seeking specific performance from the Court, your title remains free and clear (subject of course to any mortgage you may have which will be paid off out of the settlement proceeds).

In order for a buyer to put a "cloud" on your title, he not only has to file the specific performance lawsuit, but also has to file a "lis pendens" on the land records against your condominium unit.

"Lis pendens" is a Latin word meaning "suit pending," and when that document is filed with the local Recorder of Deeds, it puts the world on notice that title to your property has been challenged.

Obviously, if the first buyer has not made good on the deposit check, you will no doubt win your case. Indeed, if you have to go to Court, you should counterclaim against that buyer for damages -- i.e. the loss of that third party contract, plus the moneys you have paid for your mortgage, real estate taxes and condominium fees since the lawsuit was first filed.

But litigation is time-consuming and expensive. If that buyer sues you for specific performance, he has to represent that he is "ready, willing and able" to buy your property. If that is really the case, your best option is to agree to sell it to him, even though his price was less than the third party contract.

In the long run, settlement of legal disputes makes the most sense. My definition of a settlement is simple: both sides walk away unhappy, but nevertheless walk away.