When Can a Buyer Terminate a Contract in Real Estate?

Home Buying

When Can a Buyer Terminate a Contract in Real Estate?

June 24, 2018 | by Luke Babich

At A Glance

A purchase agreement gives the buyer and seller multiple ways to walk away from the deal, but these escape clauses come with restrictions. Understanding these requirements can be the difference between getting your deposit back, or forfeiting thousands of dollars.

When Can a Buyer Terminate a Contract in Real Estate?

Updated July 30th, 2019

You’ve found your dream home, had your offer accepted, negotiated the best price, and signed a purchase agreement. But now you need to back out of the deal.

Maybe it’s because of issues discovered during the inspection, or maybe you have problems with your financing. Maybe you just have cold feet. Those are all acceptable reasons to walk away from a deal. But the question isn’t, can you walk away from the deal? The question is, what price will you have to pay to walk away from the deal?

When it comes to the fine print in a purchase agreement, or dealing with unconventional situations like walking away from a deal that’s just on the cusp of being closed, a seasoned real estate agent is the best partner you could have.

They’ll know what to do and what not to do, and be able to advise you on the best course of action, not only for your credit score and financial situation, but for your peace of mind, too.

What is a purchase agreement in real estate?

The purchase agreement is essentially a road map to a real estate transaction. It’s a legally binding contract that spells out in detail all the terms of the sale, including the purchase price.

For buyers, there are several inclusions to protect their interests. The purchase agreement will specify any repairs that the seller is expected to make, and appliances, outdoor equipment, or other fixtures that will be included in the house. The purchase agreement also specifies when the buyer will take possession of the home and physically move in.

The purchase agreement also lists all the contingencies and conditions under which the buyer or seller can legally back out of the agreement. If either party attempts to back out of the deal for reasons that aren’t specified in the purchase agreement, they’re exposing themselves to serious legal risk.

Still, life happens, and people often have to back out of deals and break contracts. Let’s look at seven of the most common reasons that buyers back out of a purchase agreement.

7 Reasons Buyers Might Back Out of a Purchase Agreement

1. They Lose Their Job

Losing their job will obviously affect a buyer’s ability to pay back a mortgage, so it’s understandable that they might want to walk away from a deal if they’re in this unfortunate situation. Having zero income will also complicate their attempts to qualify for financing, which brings us to the next reason on this list.

2. Their Mortgage Application Is Denied

This is disastrous for any buyer, but timing plays an important part here, too. In many sales contracts, there’s a clause that states the buyer can back out of the contract if they fail to qualify for a mortgage. This is usually subject to a specific time frame; if the buyer is within that time frame, they’re entitled to a refund of their earnest money. If they’re outside the time frame specified in the contract, they’ll likely have to forfeit the money they’ve put down.

3. They Can’t Sell Their Current Home

Not being able to sell their current home can seriously impact a buyer’s ability to buy a new home, especially if they haven’t paid off their current home yet. If they apply for a mortgage on the new home while paying a mortgage on their current home, their income may not be adequate for them to comfortably cover two mortgage payments, which means they won’t be able to qualify for a mortgage on the new home until they sell their current one.

Even if they qualify for a second mortgage, some buyers may be uncomfortable with the idea of paying down two mortgages simultaneously, especially in a soft market.

4. Seller Fails Home Inspection

If serious issues are found in the home inspection, buyers have wide latitude to exit the transaction. Depending on the contract, there’s usually a specific date that inspections have to be completed by; if this date hasn’t passed, the buyer can notify the seller, in writing, of their intent to cancel the purchase agreement. In this scenario, they’ll be entitled to have their earnest money refunded.

If the inspection deadline has passed, they can still back out of the deal, but may forfeit their deposit and earnest money.

5. Seller Fails to Meet Agreed Upon Terms for Improvements Or Repairs

If the seller hasn’t done the repairs or improvements that are specified in the purchase agreement, the buyer can walk away from the deal with their deposit. In this situation, there are few pleasant options: the parties can close without the repairs, or they can close with the buyer can direct their attorney to put money in escrow to have the repairs done.

6. Seller Fails to Disclose Issues and/or Easements

Failing to disclose serious issues or defects about a property can lead to a buyer taking their deposit and canceling the purchase agreement. Failing to disclose easements, which are essentially claims that a third party has to use the property in question, could fall under this requirement, as an easement is a huge factor when considering the condition and value of a property.

7. Issues With the Title

If serious issues arise during the title search, and it looks like the seller may not be able to deliver a clean title, the buyer may walk away from the sale. If there are unresolved liens, claims or encumbrances on the title, this could represent a very serious obstacle to the buyer’s ability to claim ownership of the property. And if the seller can’t clear up these title issues, the purchase agreement may not be able to be legally executed.

How do you terminate a purchase agreement?

This varies from state to state, but there’s usually a purchase cancellation form that has to be filled out and signed by both parties, and then the termination takes effect within 15-30 days.

What are the potential consequences of backing out of a real estate contract for buyers?

The worst-case scenario for a buyer backing out of a purchase agreement is that they forfeit their earnest money. The earnest money is a deposit they put into escrow to show they’re serious about purchasing, and it comes to between 1% and 10% of the purchase price. For the average U.S. home, that could be as much as $22,700, which is a lot of money to lose.

Realistically, though, this is rare. The typical purchase agreement gives buyers many ways to exit the deal, from inspection and financing issues, to a simple objection period.

Making huge decisions like buying a home, signing a purchase agreement, or backing out of a deal that just doesn’t sit right with you can be stressful, especially if this is your first time in the home buying process. Partnering with an experienced real estate agent is the best way to make sure you have all the relevant information you need to make an informed decision.

Clever Partner Agents are top performers in their markets, and are experts at every aspect of the home buying process, from negotiating the most competitive price, to navigating a purchase agreement. They offer a full service agent experience for a low, flat fee; the thousands you could potentially save on commissions is money that can be put towards your home purchase. If you’re ready to start your home buying journey, contact us today for a free, no obligation consultation!

Top FAQs About Real Estate Contracts

1. How many days do you have to back out of a purchase agreement?

This depends on the state where the purchase is taking place, and on the specific terms of your contract. Most contracts stipulate a contingency or objection period, during which the buyer can back out of the deal without penalty, of about two weeks. This is completely up to the discretion of the buyer and seller, though, so always consult your contract for the most accurate information.

2. Can I change my mind after closing on a house?

If you’ve signed all the closing documents, and the deed was signed and recorded, no, you can’t change your mind. You now own the property.

The only way to reverse the sale is if you discover serious defects in the home that the buyer failed to disclose at the time of the sale. But this will probably require you to file a lawsuit. See the next question for more details about this situation.

3. Can you sue seller after closing?

In certain circumstances, yes. But it’s not easy.

In order to successfully sue a seller after closing, the home must have serious, material defects that were known to the seller at the time of the sale, and unknown to you, the buyer. All three of these conditions must be met to have a chance at a successful lawsuit.

Minor defects like a broken garage door isn’t serious enough; a fissure across the basement is a serious defect, but it’s also so obvious that a buyer would have a hard time arguing that it wasn’t known to them. Some types of defects that could lead to successful lawsuits are cracks in the structure that have been concealed or hidden, or renovations that don’t meet code and weren’t disclosed at the time of the sale. These are serious defects that the seller knew about, but concealed and didn’t disclose.

4. What happens to earnest money if the buyer backs out?

This depends on the timing of when the buyer backs out, and the reason they’re backing out.

Most contracts contain an objection period, during which the buyer can raise any objections and, if necessary, back out of the deal. If the buyer backs out of the deal before the end of the objection period, any earnest money they’ve put down will be fully refunded.

However, if the buyer backs out after the objection period has elapsed, they might forfeit their earnest money, unless contingencies come into play. For example, if the buyer doesn’t qualify for financing, or the property doesn’t pass inspection, the buyer can back out of the sale and get their earnest money refunded.

But if the buyer backs out after the objection period, for reasons that aren’t covered by contingencies, the seller will likely be legally entitled to keep the buyer’s earnest money.

5. What happens if the seller backs out of a real estate contract?

While a buyer can back out of a real estate contract with few penalties other than forfeiting their earnest money, it’s much more complicated for a seller. When a seller backs out of a real estate contract, they’re exposed to significant legal liability, not only from the prospective buyer, but from their own agent.

If the buyer chooses to enforce the contract, a court could force the seller to complete the sale. The listing agent could sue for their commission and marketing expenses.

However, most of the time, the buyer and the listing agent will accept payment for their expenses and move on. For the listing agent, this is usually limited to what they spent on marketing; for the buyer, this could include temporary housing costs, legal fees, inspection and survey fees, and other charges.

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