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It's possible to back out of a sales contract when selling a home—under certain circumstances. But you have to act quickly and show that you've upheld the conditions in the purchase agreement. If not, you may face significant consequences.
If you, the seller, want to cancel a home purchase agreement, it's important to understand when it's legal and what the repercussions may be.
Why Do Sellers Want to Back Out of Real Estate Contracts?
Backing out of a real estate contract once it's signed is easier said than done. It's not uncommon to second-guess the decision for all kinds of reasons. A few common ones include:
- Emotional attachment: It can be hard to walk away from a well-loved home where your kids took their first steps and reached other milestones. Whether you have a change of heart or a change in circumstances, it's not all that unusual to hesitate closing that chapter of your life.
- Unexpected life events: If you lose your job, a planned relocation falls through, you have a health setback or there's a death in the family, even the best-laid plans can change.
- Scarce housing: You may list your home thinking it will take months to sell, giving you time to find a new home. However, if the real estate market is tight and housing is scarce, finding a home to meet the timetable in the offer you accepted can be tricky.
- Concerning home inspection: If the home inspection uncovers major issues that need repair, like a new roof or updating the furnace, you may not want to make the improvements or simply can't afford to.
- Low appraisal: A lender may not want to approve a mortgage loan if the home appraisal comes in lower than the sales price, which hurts the buyer's ability to get a mortgage and gives you a way out. In this circumstance you may, however, decide to renegotiate the price of the home to better align with the low appraisal.
6 Legal Reasons Sellers Can Back Out of a Contract
Real estate contract laws can vary from state to state, so be sure to check your state's laws before walking away. But even if the law is on your side, it can be tricky to back out of a real estate contract. However, there are times when it is possible with few or no consequences at all.
1. During the Attorney Contract Review
Depending on the state, a five-day attorney review period may be required, or you can have the review period written into the contract. An attorney review usually lets both attorneys (yours and the buyer's) either approve or reject the contract or negotiate modifications. During the five days, you can typically back out of the contract, especially if there's a point you and the buyer can't agree on.
2. When the Contract Is Not Signed
To be legally binding, both you and the buyer must sign the real estate contract. You can back out without consequences if the contract is still verbal and has not yet been legally signed.
3. When the Buyer Fails to Fulfill Obligations
Generally, real estate contracts have a "time is of the essence" provision built in, which stipulates that both you and the buyer must meet the contract terms by a specific date. If a buyer fails to meet deadlines, like making sure the home inspection is done by a certain date, you may have grounds for canceling the sales agreement.
4. When the Buyer Breaches the Contract
If a buyer breaches the contract, you may have reason to back out. This can happen if they fail to get adequate financing or to close an escrow account by the time outlined in the real estate agreement.
5. When You Have a Built-in Housing Contingency
In a competitive market with little housing inventory and multiple offers, you may try to sell your home and buy a new one simultaneously. To allow the opportunity to back out of a contract, you could add a suitable housing contingency—a disclosure that states the sale of a property is contingent upon you finding housing within a specified period of time. This contingency only applies, however, when written into the contract.
6. When You've Been Scammed
There may be some extreme situations where a seller has been scammed, such as if an elderly seller has been coerced into taking a below-market-value price for their home by an aggressive buyer. Although rare, this is a situation where you can legally back out of the contract without ramifications.
What Are the Consequences When Sellers Back Out?
Once a contract has been reviewed by lawyers and legally signed, it can be very difficult to back out of the deal. In fact, you may face serious consequences if you do.
- You may be forced to sell. If you don't complete the transaction and have no lawful reason to renege on the contract, you may be forced into "specific performance"—a court order that demands the contract be executed according to its terms. That means you may be forced to sell and leave your home, and possibly pay the buyer's legal fees.
- The buyer might sue you. If you terminate the contract, the buyer may decide to take you to court. If the court finds in favor of the buyer or that you acted in bad faith, the buyer may be entitled to monetary compensation. This compensation can include the money the buyer already spent on the property (such as earnest money, inspection fees and the like) and any other compensation awarded by the court.
- The listing agent might sue you. If you signed both the listing agreement and the contract, the listing agent might have grounds to sue for lost commissions, marketing fees or other expenses related to the failed sale.
- You and the buyer may be required to attend mediation. In some states, if you and the buyer can't reach an agreement about moving forward after you walk away, you may be required to attend third-party mediation, which may draw out the process. However, mediation may also resolve the issue without massive legal fees.
Drafting a Contract With Contingencies
Many real estate contracts include contingencies, which allow either party in the real estate transaction to walk away if certain conditions aren't met, such as qualifying for financing or receiving a positive inspection. But contingencies are usually there for the buyer, not the seller.
Even so, you can ask that contingencies be written into the purchase agreement, like when the sale of the property is contingent on you finding a new home within a certain timeframe. In a tight market, it may be practical to add a contingency to minimize risks at the outset—for example, before you even list your home.
The Bottom Line
Sometimes a seller feels justified to back out of a home offer. It may be for legitimate reasons or simply a change of heart. However, timing is key. The sooner you communicate your intentions to the buyer if this is the case for you, the better for both parties.
Before entering into any real estate transaction or applying for a mortgage loan, consider reviewing your credit so a home sale doesn't get hung up for financing issues. And it may be a good idea to sign up for credit monitoring so you can be alerted to changes to your credit without any extra work on your part during this busy time.