In the world of legally binding real estate contracts, it’s anything but easy for a seller to back out. Your best best may be to appeal to your buyer, person to person. —-
You’ve accepted an offer on your home, but instead of celebrating like most sellers, you start to experience serious pangs of regret. Despite your confidence in your decision to sell before, your deep love for this home — or perhaps a sudden change in circumstances — has made you second guess everything. You need an out from what appears to be an ironclad contract with your buyer.
Unlike taking your house off the market, withdrawing from a purchase contract can cost you big time. But are you stuck? Not necessarily. In this blog, we explain under what circumstances a seller may cancel a home purchase agreement.
Reneging on a contract to sell your property can be a risky and costly undertaking. To provide you with the most expert advice, we consulted with Los Angeles real estate attorney Zach Schorr, top real estate agent Basil Yaqub, who works with over 67% more single family homes than average in his area, and veteran agent Greg Garrett, who brings more than 40 years of experience in the real estate industry to the table.
Are real estate contracts legally binding?
Unfortunately, in the world of legally binding real estate contracts, it’s anything but easy for a seller to back out. While most contracts include contingencies that may allow an escape from the deal, those loopholes are generally built in to protect buyers, not sellers.
Yaqub witnessed this firsthand in a recent transaction where the seller changed their mind after the contract was signed. “The seller had to pay the buyer $20,000 just to get out of the contract,” explains Yaqub.
Considering the alternatives, which could include pricey legal fees, a lengthy court case, or removal from the home, this was an agreement Yaqub considered to be a good deal for the seller. Over his 15 years in real estate, he’s witnessed his fair share of sellers try to back out of a contract for a variety of reasons.
Why might a seller want to back out of a home sale?
It’s “pretty common” for someone who sells their home to try to back out of the real estate contract, according to Schorr. In his nearly two decades of experience representing buyers and sellers in litigation, these are the most likely reasons sellers attempt to renege their plans:
A higher offer comes in
In a housing shortage, the market is ripe with bidding wars. It’s not unheard of for sellers to receive higher offers after signing a purchase agreement and want to back out of the contract.
Typically, the seller’s agent stops accepting offers once the home is pending sale. However, it’s often a good idea to table backup offers, which may come into play if the sale falls through. “Seller’s agents are obligated to present all offers to the seller, even after a contract has been signed,” says Garrett.
When backup offers are considerably higher than the current sale price, the seller might attempt to void the outstanding contract in favor of a higher offer. “It’s not a legitimate reason,” to terminate a contract, Schorr advises, “but it’s probably the most common.”
When considering backup offers that are higher than the purchase price, it’s a good idea for sellers to consult with their agent, who can speak to current market value. If a home appraises for less than the selling price and the buyer doesn’t sign an appraisal gap contingency or an appraisal waiver, the sale may fall through. We’ll look at buyer contingencies later in this post.
A backup offer becomes a purchase agreement the moment a seller accepts and signs it. However the seller typically cannot accept a second offer while under contract to sell. In addition, if the second buyer has made offers on multiple houses and has entered into another home purchase agreement, it may be difficult to hold them to the agreement. For these reasons — along with any potential legal implications — it can be risky to attempt to back out of a purchase agreement to accept a higher offer.
Change in circumstances
Whether it’s a relocation falling through, a family emergency, or the loss of a job, a change in circumstances can make it hard, or near impossible, for a seller to go through with the sale.
Nowhere to go
The seller has failed to find a replacement home within the closing period, and would rather stay put.
The love a seller has for their home doesn’t just disappear when the contract goes into effect. A home has happy memories that can make it difficult to part with. The sale might create unhappiness or anxiety in family members. For these reasons, some sellers feel like they’re making a mistake as the closing date looms.
Some buyers can be difficult to deal with, making unrealistic, excessive, or inconsiderate demands on the seller’s time. Unreasonable buyer requests can try a seller’s patience and create doubt about the sale.
Disagreements with the estate
If the home is being sold through an estate, tension among family members could lead to disagreements whether now is the right time to sell.
There are endless reasons a seller may wish to back out of a signed real estate contract, but most of them don’t fall under the appropriate legal grounds to void a contract.
Source: (Brad Neathery / Unsplash)
When can a seller legally back out?
Legally speaking, it’s very challenging for a seller to back out once the contract has been signed without facing some kind of blowback from the buyer. In the case of contracts, real estate law “heavily favors the buyer,” Schorr says. In his caseload, he rarely chooses to defend the seller, unless under the following circumstances:
The home sale is a verbal agreement
The most obvious condition for a seller to legally back out of a purchase agreement is if the agreement to sell is not in writing. If the seller and the buyer didn’t sign a legally binding real estate contract, the seller can usually back out at any time for any reason. In fact, throughout the U.S., real estate purchases typically require a written contract.
Seller wrote in a suitable housing contingency
Sellers trying to buy and sell a home simultaneously may include a suitable housing contingency in their real estate contract. In the case that the seller isn’t able to secure suitable housing, they might have grounds to back out of the contract. This contingency only applies if it has been explicitly written into the contract.
Note that a home sale or replacement contingency typically allows the buyer and seller to extend the closing date to allow the seller more time to purchase a home, however the contingency can be written in such a way that allows a seller to back out of the sale if a replacement property cannot be found.
While a suitable housing contingency may seem prudent, especially in a hot market where it can be tough to secure a replacement property, they’re not especially common.
“A suitable housing contingency isn’t customary for sellers here. It’d be very rare that you see that in a purchase agreement in Virginia,” says Garrett.
Contract includes an attorney review period
Some states require a five-day attorney review period or you may have one written into the contract. You can back out of a signed real estate contract if you’re within the five day period.
Buyer doesn’t meet their obligations
Often, a compelling case for a seller to back out has little to do with their actions, and more so with that of the buyer’s. If the buyer doesn’t meet deadlines outlined in the contract, such as securing a mortgage or performing the inspection within the agreed-upon timeline, the seller may have grounds to cancel the contract.
Some real estate contracts include a time is of the essence provision, which stipulates that both parties are expected to fulfill the contract in an appropriate amount of time. “Many buyers don’t perform in a timely manner,” Schorr says, “and those can be big outs for the seller.” If that’s the case, the seller will want to pay close attention to dates and the buyer’s actions to build a compelling case to pull the contract.
Scams or hustlers were involved
In extreme cases, the seller might have grounds to back out of a contract if they’ve been swindled, or agreed to sell the house for an incredibly low price. Schorr experienced this in the case of elderly sellers getting offers from aggressive buyers. “These are extenuating circumstances, but I’ve represented between three to five sellers in cases like this over the past year,” he says. In his experience, the sales price has to be blatantly below the market value — a lowball offer won’t void the contract for the seller.
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Do buyer contingencies allow a seller to back out of the sale?
As noted, most home purchase contracts are built to protect the buyer, not the seller, with buyer contingencies typically built into the contract by default. Your buyer will likely have the freedom to walk away at any three of these moments without losing their earnest money, effectively voiding the contract and giving the seller an out, too.
Inspection contingency: If a buyer finds something they’re unhappy with during the inspection process and can’t make amends with the seller, they can walk away with no consequences. While it is reasonable and fair for the seller to negotiate the repairs they will make or pay for, and some repairs may be required by the buyer’s mortgage company, the seller isn’t obligated to do so by law.
Garret says, “We had a seller who decided not to sell and made it clear upfront that they were going to be uncooperative.They refused to agree to any repairs when the home inspection came in. They refused a second showing so the buyers could show the home to their parents. When the buyer wanted to measure for drapes and furniture, the seller wouldn’t allow it. While the seller didn’t have the unilateral right to cancel the contract, they frustrated the buyer to the point that they backed out of the sale.”
While that may seem like an unsavory way to get out of a real estate contract, ultimately it’s within the seller’s rights. “The seller’s agent is bound by a code of ethics but not the seller. The seller gets to decide for themselves if they’re going to be reasonable, fair, or ethical,” states Garrett.
Appraisal contingency: If the appraisal comes in low, the buyer may negotiate for a lower sale price. However, the seller isn’t obligated to lower the sale price. If negotiations fall through, the buyer has the option of backing out of the contract, unless the buyer has signed an appraisal gap guarantee promising to cover the discrepancy with their own cash.
Financing contingency: This protects the buyer in the event their mortgage falls through for any reason. A buyer may negotiate for more time to secure financing from a different loan company, however the seller is under no obligation to extend this courtesy and may walk away from the deal if the buyer cannot secure financing before the agreed upon date.
A seller can’t invoke any of these contingencies, but in the event that a buyer does, both parties can walk away without repercussions. Most sellers would be disappointed to find themselves back at square one, but if you were looking for a way out, any willful canceling on the buyer’s end using a contingency would be a blessing in disguise.
What happens if the seller cancels the contract?
Life happens, and a seller may have to cancel their contract, even if they can’t legally do so. In the event that a seller cancels their contract outside of the legal grounds, they can face some or all of the following repercussions:
The buyer may force the seller to complete the sale
If the seller doesn’t have the legal ground to stand on, they may be forced into “specific performance,” which is legalese for completing the transaction.
If the seller chooses to fight the contract, they’ll be entering a long legal process. In the event the buyer wins, the seller may be legally compelled to sell the property to the buyer, and may even be ordered to leave the home by the court and forced to pay the buyer’s legal fees.
The buyer can sue the seller
If the buyer believes the seller’s grounds for terminating the contract aren’t sound, they can take a seller to court and request monetary compensation for the loss of the home and that the seller pay their legal fees.
If the court finds that the seller acted in bad faith, the buyer may be entitled to compensation in addition to recovering the money they already spent on the property.
The buyer can place a lien on the property
Since the buyer has a legal right to the property, they can often file a lis pendens, or lien on the home. That means the buyer has staked their claim on the home and makes it challenging to sell the home to any other potential buyers.
The listing agent can sue the seller
Not only did the seller sign the contract for the sale of the home, but they also signed the listing agreement with their agent. Failure to complete the contract may give the agent grounds to sue the seller. If the listing agent takes legal action against the seller, the seller may be on the hook to pay the agent the promised commission on the property, even if the sale doesn’t take place.
The seller may be forced to attend mediation
In some states, like California, if the buyer and seller can’t reach an agreement around termination of the contract, they’re typically required to attend mediation sessions before heading to the arbitration courtroom. This could resolve the dispute with less legal fees than court, but will also draw out the process further.
Need to back out of a contract? Keep these tips in mind
Even if you don’t have the legal grounds to do so, circumstances might force you into backing out of a contract. These tips from our experienced agents and attorney may help you avoid a legal battle:
Consult an attorney
Take your concerns to a real estate attorney, who will review the terms and conditions of the real estate contract with you and provide expert legal advice to prevent you from taking a false step. An attorney will let you know what repercussions you may face if you proceed, and may even find a loop-hole that will allow you to legally walk away from the deal.
Appeal to your buyer, person to person
If you feel comfortable sharing why you need to terminate the contract, your buyer might be more willing to sympathize and waive their legal case.
In the National Association of Realtors’ Buyer-Seller Dispute Resolution System (DRS), the organization suggests the two parties try to resolve the issue in a negotiation process via their agents before roping in a neutral third party.
If sickness, family emergency, or a change in finances makes it necessary to keep your home, try explaining it to your buyer through your agent or attorney. These aren’t legally sound reasons for ending a contract, but the buyers may have compassion for your plight. Asking the buyer to see the experience through your eyes could help save you legal fees. If a buyer is sympathetic to the seller’s circumstances, they’re less likely to pursue legal action. It might be as simple as reimbursing the buyer’s expenses and asking them to walk away from the deal.
Offer a refund
Don’t expect a buyer to walk away for free, especially if you don’t want to share your reasoning for ending the contract. At bare minimum, a buyer will likely expect to be reimbursed for the expenses incurred in the closing process, including inspection and appraisal fees.
Offer to pay damages
Backing out of a home purchase agreement can put an undue amount of stress on a buyer. Especially if they’re selling their own home or relocating for a job. And particularly during a housing shortage. On top of the costs the buyers have incurred in the closing process, you may want to offer some cash to let them down easily.
As Yaqub mentioned, his seller was willing to part with $20,000 to ask the buyers to walk away from the deal. There’s no hard and fast number to offer, but sellers should be willing to negotiate if they want to keep the home. Think of it this way, if you can’t come to an agreement at this stage, you’ll have to try mediation or arbitration (or worse, court!), where the costs start to skyrocket.
What are the next steps?
With the information we’ve provided in this article, you should feel confident about how, when and under what circumstances you can pull out of a real estate contract. If you’re considering backing out of your home sale, be sure to speak to your listing agent and a real estate attorney to avoid a costly legal battle or forced sale.
Disclaimer: This article is meant to be used as a helpful guide, and is not to be taken as legal advice. If you need legal help with a real estate contract, please contact a skilled real estate attorney.
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