You have to make a quick decision, and you must be ready for a few consequences.
Can a Seller Legally Back Out of a Real Estate Contract?
The short answer is yes, you can legally back out of a real estate contract in very specific circumstances.
If you and the buyer have both signed a home purchase agreement, you’ve signed a legally binding contract that outlines how much you’ll get for your property, the closing date, and all other information pertaining to the sale. Unless that contract has specific language in it that says otherwise, you’re legally bound to sell your home or investment property.
However, if you have an attorney review clause in your contract, you may have a chance to rescind your offer to sell. Certain states require that a real estate attorney be involved at the closing and during the entire buying and selling process. But every seller should include an attorney review clause. It gives a few days after signing to review the contract on both sides. If you need to make changes, resolve any legal issues, or one party wishes to back out of the agreement of sale, this is the time to do so.
Other than this option, a seller can only legally back out of the sale if a part of the buyer and seller agreement hasn’t been met or if a buyer fails to secure funding.
How Sellers Can Get Out of Their Real Estate Contract
Even after all the paperwork has been signed, there are still ways you can get out of a contract.
The Buyer Can’t Secure Funding
When a buyer makes you an offer, they often don’t actually have funding in place. The whole deal rests on them being able to secure a mortgage. If that doesn’t happen, the seller has the right to back out of the deal.
You & the Buyer Reach an Agreement
If you contact the buyer and simply explain your situation, they may understand and agree to a mutual dissolution of the sales contract. While you may have to agree to pay the buyer back for any costs they took on when making their initial offer, such as the appraisal fee or home inspection fee, coming to a mutual agreement can save you thousands in mediation of legal fees.
The Buyer Fails to Meet All Requirements
When going through the buying process, the contract contains numerous stipulations the buyer and seller must meet. Buyers must pay a certain amount in earnest money on a certain date, as well as potentially meet other obligations by certain dates. If these obligations aren’t met, the seller has the right to terminate the contract.
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Housing Contingency Clause
When the housing market is booming, buyers have an easy time selling their home, but not such an easy time buying another one. The market is saturated with buyers looking to one-up you on your offer. If that’s the case, you may have added a housing contingency clause to your contract.
This clause states that you’ll only sell your home if you can find another suitable home within a certain time frame. If this was written into the contract, the buyer has the right to back out if they can’t find a new home.
You Suspect a Scam
Unfortunately, real estate scams happen to over 13,000 people each year. If you suspect you’ve been a victim of fraud in some way, you can likely legally back out of your sales agreement. Contact your real estate agent and let them know that you think the buyer is attempting to scam you and they will connect you with a lawyer who can help you legally dissolve the purchase contract.
Why Sellers Would Want Out of Their Contract
Your real estate agent has likely warned you that backing out of a home sale can sting financially. Still, there are reasons sellers want or even need to keep their homes. Some of those reasons include:
- The seller simply doesn’t want to sell: Nostalgia kicks in when selling a home. It contains all your family memories and has been the place you called home for years. This can be difficult to part with. Just like buyers may have buyer’s remorse, sellers may regret deciding to sell halfway through the process.
- A higher offer came in: If a higher offer comes in, most sellers don’t want to pass up that opportunity. They’ll want out of their current deal so they can accept the higher offer.
- The seller’s finances may have suddenly changed: If the seller suddenly loses their job or suffers a costly health issue, selling their home isn’t the first thing on their mind anymore.
- There are limited housing options: If the seller can’t find proper accommodations before or while in the middle of selling their home, they may want to forgo selling their home for the time being.
- The seller is unwilling to do needed repairs in order to sell: If a home inspection turns up multiple issues that the buyer wants fixed, sellers might not have the capital on hand to make those fixes. If the buyer and seller can’t resolve this issue, the buyer can terminate the deal and look for a more flexible buyer.
- The property fails to appraise: A home is appraised before selling, which determines the value of the home. If the appraisal comes in low, but the seller is looking to sell at a higher price, they may want to wait until the market picks up or until they can make the necessary changes to up the home’s value.
- Other owners may not want to sell: If multiple people own a home or investment property together, they may not agree on all the terms of the sale. For example, if siblings go to sell a parent’s home after they pass, not all members of the family may want to sell. It’s not always apparent that one or more parties are reluctant to sell until there’s already a buyer lined up.
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Consequences for Terminating a Seller Contract
You can’t just back out of a contract with no consequences. You’re the one who agreed to sell your home or rental property in the first place. That said, we’re all human and $hit happens.
If you do want to back out of your real estate contract, beware of the following potential consequences:
- You might get sued by the buyer: A seller contract is a legally binding contract. Unless you have a legal reason to dissolve the contract, the buyer could sue to force the sale. The case goes before a judge to decide. With lost time and sunk fees, they’re out a lot of money if you suddenly decide not to sell.
- Your real estate agent may also sue: Your real estate agent has dedicated a lot of time and lost wages and commission if you back out of your deal last minute. In turn, they may decide to sue you in order to make back this lost money.
- You’ll cough up for fees: From appraisal fees to earnest money, agent fees, and inspection costs, you’ll have to pay the buyer back for all of them.
Backing out of selling your home has a lot of negative consequences and isn’t all that easy to do. If you thought ahead and added contingencies to your contract that gives you a way out, you can likely back out of a deal if absolutely necessary.
Without this language in your contract, the only other way out is if the buyer has caused an issue or has not met their end of the deal. It’s vital you think long and hard about selling your home and the cost associated with that before diving in. It’s difficult to get yourself out once the paperwork has been signed.♦
Have you ever backed out of a real estate sales contract? Why and how did you do it?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian & Deni for a free class on how to earn 15-50% returns on passive real estate syndications.