Canceling a Real Estate Contract: How to Do It Legally

Canceling a real estate contract is generally permitted before closing on a house. However, whether you risk losing money or facing penalties depends on the timing and reasons for cancellation.

Both buyers and sellers may wish to cancel a purchase agreement for various reasons, but the most common justification is that the buyer discovers hidden issues during inspections or the final walkthrough.

Note that exact rules surrounding canceling real estate contracts differ by state, so you should always talk to a professional about your specific circumstances.

You can search for top local real estate agents with Clever to find knowledgeable agents who can help you avoid making costly mistakes.

Can you cancel a real estate contract?

You generally can cancel a real estate contract with no penalties — provided you have a valid contingency. Contingencies are contractual requirements that must be fulfilled before the sale can proceed.

If one or more contingencies are not met, the buyer or the seller can back out of a contract without legal repercussions.

Canceling due to a change of mind (getting “cold feet”) or for non-contingency reasons may still be allowed, though the buyer could lose their earnest money deposit. Some contracts won’t allow canceling without a valid contingency reason.

Valid reasons for canceling a real estate contract as a buyer

Several contingencies can be grounds for terminating a real estate contract before closing. 

1. Financing or mortgage contingency

This contingency states that if a buyer cannot secure a mortgage loan or other financing to help them purchase the house, they can cancel the deal without penalty. That way, buyers won’t be locked into a contract to spend money they don’t have.

2. Home inspection contingency

Buyers can also condition a sale on the home inspection. If major issues are found (structural problems or system failures, for example), and the buyer and seller can’t agree on how to handle pricing or repairs, the buyer can walk away.

At the very least, homes must meet minimum habitability requirements and be structurally sound to qualify for most conventional loans. Buyers can add further inspection contingencies if they desire.

3. Appraisal contingency

Buyers can also terminate a contract if the sales price doesn’t meet appraised values. This may occur if the seller tries to sell the house for more than it’s worth.

4. Title contingency

Unresolved liens, ownership disputes, and other title issues can be valid grounds for canceling a real estate contract.

5. Home sale contingency

The buyer can also condition the purchase on their ability to sell their current home. The home must sell within a specified timeframe so that the buyer is not responsible for two mortgages.

6. Seller breaches the contract

One of the most common reasons for termination is contract breaches and violations, like failing to make required repairs or not disclosing certain property features.

7. Mutual agreement to terminate

Both the buyer and seller can mutually agree to terminate the sales agreement. This may be the case if the inspection goes poorly and both parties agree to walk away.

When can you cancel before closing? Key deadlines and timelines

The purchase agreement should define a time period during which the buyer can object to the contract due to contingencies. The exact length of the period depends on the specific contingency, however. 

For instance, inspection contingency periods are usually one to two weeks, but financing contingencies may have a longer window. 

The contingency period may be defined as a specific calendar date or a specific number of days after both parties mutually accept the contract. Once the deadline passes, cancelling becomes significantly more difficult, but not necessarily impossible. 

Note that some states have a “cool-off” period after signing a contract that allows the buyer to back out without consequences. This cool-off period typically only applies to certain types of property purchases. 

For instance, Florida mandates a 15-day and 7-day cool-off period for new condo purchases and condo resales, respectively.[1] Not every state has a cool-off period for real estate contracts, so check with state law before making any decisions.

What happens to the earnest money when a deal is canceled?

Earnest money is a “good-faith” deposit the buyer puts down on the house to express their commitment. It typically equals 1% to 3% of the home's price and is held in escrow until it is applied to closing costs.

What happens to the earnest money depends on when and why the deal is cancelled and who cancels it:

• If the buyer backs out of the deal and a contingency covers the reason for termination, buyers usually get their earnest money back without penalty. 
• If the buyer’s termination reason isn’t contingency-based or happens after certain deadlines, the buyer can lose the earnest money deposit. 
• If the seller backs out of the deal, the buyer should get their earnest money back in most circumstances. If the seller’s reason for terminating isn’t contingency-based, the buyer might also be able to bring legal action against the seller.

During disputes, any earnest money deposit is held in escrow until the contract is resolved, either by mutual agreement or through litigation.

The treatment of earnest money can be a significant source of conflict in real estate, so make sure you understand contract conditions.

How to legally cancel a real estate contract as a buyer

Below is a step-by-step guide for canceling a real estate contract as a buyer.

1. Review the contract

Review the contract to identify specific contingency clauses and conditions. Have a real estate agent or a lawyer go over the contract. Check for details like objection periods, deadlines, and cancellation procedures.

2. Confirm the grounds for cancellation

Connect the cancellation reason to an existing contingency. This could be financing, inspection, appraisal, or title grounds. The reason needs to be couched in terms of the contingency to avoid disputes.

3. Provide written notice before the deadline

Most contracts require parties to give written notice to cancel, as verbal notice is not sufficient. Check to see if the state has a cancellation or termination form to properly structure the notice.

4. Sign a termination or mutual release agreement 

A mutual release agreement specifies that both parties agree to terminate the contract and that the seller will release any earnest money deposited.

5. Document everything

Make sure to keep copies of any relevant documents, such as the purchase agreement, inspection reports, loan denial letters, and communications with the seller.

Real estate contract law is complex, and disputes can involve lengthy litigation if they progress. It’s always smart to get legal advice from a professional if you face serious issues.

Cancelling a real estate contract as a seller

So far, we’ve focused on buyers canceling a real estate contract, but what about sellers? How can a seller back out of a real estate contract?

Generally, the seller can include contingencies in the contract that allow them to terminate the sale if they are not fulfilled. Common reasons for the seller to cancel a contract include:

• The buyer misses the deadline for an earnest money deposit. 
• The buyer doesn’t secure sufficient financing.
• The seller couldn’t find another suitable dwelling.
• The buyer otherwise violates contract terms
• The buyer and seller sign a mutual termination agreement.

Again, the specifics of sellers backing out of real estate contractors depend on the state. If the seller tries to back out for a contractual invalid reason, the buyer could file a specific performance lawsuit and attempt to compel them to follow through with the sale.

Similar to buyers, sellers should also consult a legal professional before backing out of a real estate contract.

Can you cancel a real estate contract after closing?

You generally cannot cancel a real estate contract after closing, as the sale and documents have been finalized. Once the home is closed, the property changes hands.

Most post-closing problems are addressed by lawsuits for issues such as fraud or misrepresentation. For instance, if the seller didn’t make a legally required disclosure, the buyer could potentially take them to court for breach of contract.

So while buyers can’t simply change their mind after closing, they can sue the seller if they discover some kind of misconduct. Talk to a legal professional for guidance on pursuing legal action.

Canceling your agreement with your real estate agent

Canceling a real estate sales contract is a different matter than canceling a listing agreement with a real estate agent. This is a separate agreement that has its own cancellation terms and clauses.

To request a release from a listing agreement, you need to contact your agent or broker and supply adequate written notice. Similar to a real estate contract, breaking an agreement with an agent can carry penalties (such as early termination fees) without a valid reason for cancelling.

Risks and consequences of canceling a real estate contract

Canceling a real estate contract without a contingency-based reason or outside of defined periods can open you to the risk of penalties and legal action, including the following:

• Lose earnest money: Buyers may lose some or even all of any earnest money deposit made. 
• Face legal action: Depending on the terms, the other party may be able to sue you for breach of contract if you back out without a contractually valid reason.
• Pay the seller’s expenses: Buyers may also be required to reimburse the seller for any expenses they incurred, such as moving and alternative housing costs.

You don’t want to get yourself into legal trouble, so ensure that you follow the appropriate cancellation process and do so within the allowed contingency periods. Following the rules can significantly reduce your risk of facing legal troubles.

How a great agent helps you avoid costly cancellations

Most buyers and sellers lack experience navigating real estate contracts and may encounter problems if they attempt to cancel without a valid reason.

An experienced real estate agent can help you structure contingencies and negotiate deadlines, giving you flexibility when deciding. An agent can also identify red flags early so you don’t have to cancel at the last minute.

From a seller’s perspective, an agent can screen potential buyers to reduce the risk of reneging and set firm expectations. This can save you time and money on expensive litigation if the buyer breaches contract obligations.

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