Can the Seller Back Out of Contract Before Closing?

Home Selling

Can the Seller Back Out of Contract Before Closing?

July 31, 2018 | by Reuven Shechter

At A Glance

What happens if a seller backs out of a deal you have both signed a contract? What are the consequences and what recourse does the buyer have? Learn how a top agent can help you by negotiating properly in the beginning.

Can the Seller Back Out of Contract Before Closing?

Updated July 8th, 2019

It seems horror stories about sellers backing out of real estate contracts are increasingly common. Sellers with dollar signs in their eyes list their home, eager to make a bunch of money and purchase their dream home.

They get a fantastic offer and then realize they don’t want to sell and slam on the brakes. Full of panic and horror, they try to get out of the home sale before closing. Can the seller back out of contract before closing — and does the home buyer have any recourse if they do?

You need a top real estate agent on your side to negotiate on your behalf in case a deal goes sour.

Why would a seller back out of a purchase contract?

It's uncommon for home sellers to list their home only to back out of the sale for no apparent reason. Their new home purchase may have fallen through, their life circumstances may have changed, or something else may have prevented the home sale. Here are just a few common reasons sellers may have to renege on a purchase agreement for a home:

The Appraisal Came Back Low

One of the biggest reasons a seller may have for wanting out of the sale is the appraisal coming back too low. In a seller’s market, when house prices are climbing and potential buyers are outbidding other potential buyers, it’s easy to see that number rise and think it will be smooth sailing.

Sellers often forget that the amount the buyer offers is not a reflection of what a bank will approve. The bank will not loan more money than the home is worth. If the appraisal comes back for less than the offer price, the seller doesn’t have many options if the buyer can’t make up the difference in cash.

They Can’t Find a House

As soon as a seller receives a great offer, they might take that as their invitation to go find their own home. When they begin their search with what they thought was more than enough money to buy, they may find themselves at a loss for a suitable property.

In a seller’s market when the prices are high and inventory is low, even a fixer-upper goes for a high price. If the seller finds themselves in a bind and can’t find a house, they have few options left. If their real estate agent made the sale contingent upon the seller finding a home, they should be able to back out of the sales contract without a problem. However, there is no such contingency, however, they may get their home back, but they will end up having to pay a price for it.

Change in Life Circumstances

Another reason a seller may want to back out is because of an unexpected life event. This could be the sudden loss of a job or a death in the family that makes it financially difficult for them to move. It could also be the reason for the move (such as a job opportunity) is no longer available. In situations out of the seller’s control, most buyers will be understanding. However sympathetic a buyer may be, they will want compensation for the appraisal and a home inspection.

What happens if the seller backs out before closing?

Remember that a contract is legally binding. Which means if you break your end of the deal (in breach of contract), you could be taken to court and be required to compensate any damages caused by your actions. These consequences could mean refunding the earnest money or repaying the buyer for requisite storage and living expenses.

Consider hiring a real estate attorney in addition to your listing agent to ensure your contract protects you even if you have a change of heart, cold feet, or an emergency.

How can a seller avoid fees when backing out of a contract?

When you’re waffling on the sale of your home, consider the reasons you had for listing your home for sale. If those reasons are still valid, then you need to decide if they are still worth pursuing.

Think about whether a preference is the only thing holding you back from holding up your end of the bargain, then sit down and weigh the pros and cons. If you still want to back out, there are some ways you might do it without serious consequences.

Write a Letter to the Buyer

It doesn’t hurt to write a letter to the buyer. In your letter, try to be diplomatic and factual. If selling the house brings unforeseen financial hardship, you could propose extending the sale (if the hardship is temporary), or talk to them about having an option to buy if you sell at some future date. This just might give them the incentive they need to walk away peacefully even though you're canceling their home buying agreement.

Have Contingencies Written

Having doubts may be normal, but it is your responsibility to make promises you know you can keep. If you are doubting your choice to sell before a contract has been written up, have your real estate agent put contingencies in the contract. Some contingencies include making the sale contingent upon you finding a house to buy, or a job goes through. Covering your bases in advance helps not only your integrity but is also in the best interest of your wallet.

It may seem like an unjust situation when you legally still own your house but have to pay a fine in order not to sell it. It is always a good idea to consider these things before you sign the contract. As soon as you sign your name, you agree to the terms, and there may be very little you can do to get out of it.

Want a real estate agent who knows contracts like the back of their hands? You need a top local Partner Agent from Clever. At Clever, we work with the best real estate agents in your area to provide you with the level of service you need for just a flat fee of $3,000 or 1% of the listing price over $350,000. Fill out our form to get in touch with an expert negotiator who can help you if you need to back out last minute of a real estate transaction.

FAQs About Sellers Backing Out of Real Estate Contracts

Can a seller back out of an accepted offer on a house?

If the seller has accepted the offer on their home, they are obligated to perform if the buyer fulfills their obligations. However, if the buyer can’t meet contingencies (such as appraisal or lending), the seller may get out the contract unscathed. If the buyer holds up their end and the seller doesn’t, they’re in breach of contract and would be liable for damages, according to the terms of the contract.

Can a buyer back out of a real estate contract before closing?

Yes, a buyer can back out of a sales contract before closing — but what are the consequences. Buyers typically put down an earnest money deposit, between 1-10% of the sales price of the home. If the buyer backs out, they may have to forfeit part or all of this money, depending on the terms of the original sales agreement, including contingencies in which the buyer can walk away.

Can the seller back out of escrow?

Yes, theoretically the seller can back out of the sale even during the escrow process. However, there are few reasons the seller could cancel this late without penalty. Review the real estate contract to ensure the seller has no recourse to back out without warning. Sometimes, you may file a civil suit against the seller for damages because of a change of heart this late.

Can the seller back out of the contract after the home inspection?

The home inspection is a key time for sellers to back out of a sale, usually because buyers will ask for sellers to make repairs to the property or issue a “repair credit” to cover those costs, which can easily cancel the real estate contract. This is called “constructive cancellation,” because the seller forces the buyer’s hand, to either let go of their requests or back out of the deal. The seller isn’t backing out themselves, they’re forcing the buyer to do so by refusing to meet what could be reasonable requests.

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