When is it a good idea to back out of a real estate deal? You may stop the process at any time, but if you wait too long or don’t have a good reason you may have dire consequences. Buyers and sellers each have reasons that they may cancel a contract without penalty. What happens if a:
- Buyer ends the transaction
Sellerends the transaction
Property contracts have provisions that protect buyers and sellers for most problems that can go wrong with a transaction, but you must remember that you are entering a legal agreement. Getting cold feet or personality conflicts aren’t good reasons to cancel a deal without penalty.
What Happens When You Back Out
What happens if you back out of buying a house depends on timing and issues with the property. Buying a house is a big investment, and there are safeguards to make sure you are making the right decision. You must decide what is best for you at each stage of the process.
- Either party may cancel the contract before it has been reviewed and signed by an attorney.
- The buyer or seller may also cancel a contract with little or no penalty for issues related to the home inspection.
- Each party can cancel up to the closing, but there may be significant penalties.
You can see that there is a period in the beginning when you can change your mind. Further, there is a period where you can make sure the house is structurally sound. Finally, you can cancel a deal all the way to the day of closing, but there will be penalties.1
After Making an Offer
Many people change their minds on a house after making an initial offer and back out of the real estate deal. If the seller accepts the offer you have time to think about if you really want the house. After signing the paperwork you can cancel with no penalties. Even during attorney review, it is still ok to cancel the contract.2
After Offer Acceptance
You can withdraw an offer on a house. However, you may lose your earnest money, or the seller may sue you. If you are early in the process this is rare.
- In states that have attorney review it is not a legally binding contract until attorneys have signed the contract.
- There are contingencies within the contract that allow either party to withdraw if certain conditions are not met.
The timeline for buying a house is long, and the process allows time to make sure the deal is good for both the buyer and the seller. Don’t worry so much about if you have time to cancel. Make sure you understand the contract and the contingencies to protect your investment.2
After Home Inspection
The home inspection is an important contingency that allows you to back out of a real estate deal. No matter how well you examine the house there may be problems that you cannot see.
- A good home inspector will find any major problems with the house.
- Make sure you complete your home inspection within the timeline of your contract.
The home inspection is included in a contract to protect the buyer. In most cases this clause allows very broad reasons for cancelling the contract.3
Backing Out the Day of Closing
A buyer can back out of a real estate deal on the day of closing, but they will probably have significant problems. A buyer:
- Will probably forfeit
earnestmoney. May besued. May have to pay penalties for the seller’s wasted time.
It is always better to take care of problems early, but if issues arise at the last minute remember that it is very difficult to cancel at the closing. If you do cancel you may lose earnest money and be legally liable for damages.4
Seller Backing Out
A seller may back out of a home sale under certain conditions, but if they just get cold feet, they may face similar legal problems as a buyer.
A seller may back out of an accepted offer under certain conditions. There are clauses in the contract that protect a seller. Some examples are:
- Contingencies, such as being able to find a new place to move.
- The buyer didn’t adhere to the terms of the contract, such as not being able to get a mortgage.
- The buyer requests repairs that the seller is not willing to do.
These clauses protect the seller and give them an out without penalties. However, if the seller decides that they just don’t want to sell the house the buyer can sue.5
In most cases the seller can back out after a low appraisal. Most contracts have a loan contingency clause that allows the seller to cancel the transaction, but is that the best course of action?
- Buyers can make up the difference in price. The seller could lower the price. Or they could compromise on the difference.
- Sellers can carry a second mortgage for the difference.
- They can dispute the appraisal and order another.
There is no guarantee that the next buyer won’t have the same problem. It may be in the seller’s best interest to work with the buyer and find a solution. However, if there is no way to work out the difference then most contracts have loan contingencies that allow the seller to back out without penalty.6
A seller may back out of a contingent offer under certain conditions, but it is important to remember that these clauses are included to protect the buyer. You should review the contract and make sure that there are provisions to protect your interests.
- Make sure there is a contingency date specified that the buyer’s home must be under contract.
- Make sure there is a “kick-out” clause that allows you to continue to market your home.
The details of the contingency must be in the contract, and you should make sure you understand what those provisions mean. If your attorney writes the provision well, then you should be able to cancel if your buyer has trouble selling their house.7
A seller can walk away from a real estate deal at closing, but they will probably have many problems. It is very rare for a seller to pull out at the last moment. However, there are a few cases where a seller can pull out at the last minute without penalty.
- Sometimes a buyer’s financing will fall through at the last moment.
- If there are lingering home inspection issues that cannot be resolved.
These cases are rare, but they do happen. Since sellers don’t put up earnest money, the only recourse for a buyer is to sue if the seller pulls out without a good reason. Fortunately, a case like that is very rare.