Chris came in this late, but, has your friend considered putting the property up for a short sale? This may be his best way out, or if you are looking at this house as an investment, you may want to consider getting an appraisal (about $350) bucks to determine if you even want to get into this situation. Also, you may need to have a heart to heart with your friend to make sure there aren't any "oops I forgot to tell you about the additonal liens on the property", those tend to be "forgotten" in casual conversation. As far as the other house you have an accepted contract on, you may be out of luck with the earnest money if you didn't buy an option period. Hope this helps.