Can You Back Out of Your Real Estate Contract?
Buying or selling a home is a life-changing decision. So, it’s no surprise that sometimes, a buyer or a seller will suddenly change their mind and decide to back out of a signed real estate contract, or home purchase agreement.
Can someone legally do this? The short answer for both parties is yes. But whether you’re a buyer or a seller, canceling a real estate contract can come with a few consequences. In some cases, you could run into serious financial and legal implications.
Can a Buyer Back Out of a Real Estate Contract?
As a home buyer, yes, you can back out of a home purchase agreement. What happens next, however, is determined by the terms and conditions of that agreement.
If you’ve signed a home purchase agreement, you’ve probably put down an earnest money deposit of 3% – 5% of the home’s purchase price. Sometimes, the earnest money deposit can be as high as 10%.
The seller will likely keep this money if you back out of the sale for a reason not stipulated in the home purchase agreement. On the other hand, if you back out for a reason that is listed as a contingency in your contract, you can get your earnest money back.
For example, let’s say you were only planning on buying a new home after selling your current home. If you’re unable to sell your current home and you included a home sale contingency in your contract, you could back out of the sale and get your earnest money back.
There are certain contingencies are standard in the industry, such as:
Home Inspection Contingency
A home inspection contingency allows the buyer to back out of a home sale if the home fails a professional home inspection during the inspection period. Without this contingency, someone could be legally obligated to purchase a home with significant structural problems or jeopardize their deposit.
Appraisal Contingency
Mortgage lenders typically require appraisals to determine a home’s fair market value. This way, they won’t have to lend you more money than the home’s estimate value. But sometimes, the home’s agreed purchase price turns out to be higher than the appraised value, forcing the buyer to pay the difference out of pocket or negotiate another arrangement with the seller. If the contract includes an appraisal contingency, the buyer can back out and keep their earnest money.
Financing Contingency
This protects the buyer if they can’t secure financing – like a mortgage – to purchase the home.
Can a Seller Back Out of a Real Estate Contract?
Like buyers, sellers can legally back out of real estate contracts if their reason aligns with an included contingency. If their reason does not align with an included contingency, the seller would have to return the buyer’s earnest money and may face legal action.
The buyer could sue, asking the court to enforce the home purchase agreement. If the buyer has incurred unnecessary costs from the canceled deal, this person could also sue for damages. Additionally, the seller could face action from their real estate agent due to their lost commission.
The key to walking away smoothly from a real estate contract is including the right contingencies. If you’re considering backing out of a real estate contract without a contingency, it is wise to consult with an attorney before canceling the deal. You may be able to come to an agreement with the buyer or seller that saves both parties time and money.
