How Can a Seller Back Out Of A Real Estate Contract Before Closing?
What You Will Read In This Article
Perhaps you’re a seller who has meticulously planned the sale of your home only to realize (last minute) that the deal you signed is not in your best interest or perhaps your needs have suddenly changed.
On the flip side of the coin, maybe you’re a buyer who has concerns about how “solid” your purchase agreement is and whether or not “cold feet” from a seller could put the ownership of your new home at risk.
This guide will take you through the ins and outs of a purchase agreement, and the situations in which a seller might be able to (legally) back out of the deal before closing.
Similar to buyers, sellers can have last minute remorse regarding the deal they first agreed to. Homes often have a lot of emotional sentiment and it can be difficult for some to “let go”. In other cases, last minute issues with living arrangements (such as their own purchase deal falling thru) or a change in employment locations can play a role.
Wait, Isn’t a Purchase Agreement Legally Binding?
Correct. A seller can’t just “back out” because they feel like it. A signed purchase agreement is a legally binding document. As such, backing out could open the seller up to financial repercussions and/or a lawsuit.
However, there are certain situations under which a seller may be able to back out of the deal without any negative implications.
Common Reasons Sellers Opt to Back Out of a Purchase Agreement
PRO TIP: Just because these reasons are common doesn’t mean that they make backing out of an agreement a legally acceptable thing to do.
In most cases, sellers are highly motivated to sell and ready to move on with their lives (literally with their bags packed and ready to go). However, there are a few common reasons why we see sellers back out of deals.
- Unable to Find a Suitable Replacement: Sometimes sellers “jump the gun” or “put the cart before the horse” so to speak. They are so eager to sell and move that they accept an offer before they have had a chance to lock in new housing arrangements.
- Seller’s Remorse: As mentioned, it’s natural to have an emotional connection to the home where you grew up or experienced fond memories with loved ones and family. In some cases, a seller may feel like the new buyer simply won’t respect or take care of the home they love.
- Unexpected Life Events: Medical emergencies, unwell family members, accidents, failed job transfer, pregnancies and more can all dramatically alter the intended trajectory of one’s plans.
- Lower Than Expected Appraisal: Banks financing buyers conduct their own appraisals before granting a loan. In some cases, the bank may have come back lower than the asking price and the seller is not willing to negotiate a lower price, resulting in them canceling the deal.
Ways A Seller Can Get Out Of A Purchase Agreement
Now that we know the underlying reasons behind why a seller might want to back out of a purchase agreement, let’s look at the specific ways in which they might opt to do so.
The contract Hasn’t Been Signed Yet
Don’t count your chickens before they hatch. Both the seller and buyer need to understand that the deal is not official until a contract has been signed by both parties.
PRO TIP: In some states or jurisdictions, a verbal agreement may be enforceable. However, the majority of states require a signed written contract for the sale of real estate.
Contract is Still in the Attorney Review Period
Most home sales include what is known simply as an “Attorney Review Period”. In some states this period is mandatory (If not it can be added as a clause in the agreement). Typically ranging between 3-5 days, this is a window of time during which each party’s attorney may review the contract before it becomes enforceable.
Seller Has a Contingency Addendum in the Contract
Sellers (and buyers) can include several contingencies in the contract that provide them with escape routes should they want to back out of the deal.
New Home Contingency: This particular contingency gives the seller the right to back out of the home sale contract if they are unable to find a new home that is suitable for their needs.
Home Inspection Contingency: If a buyer’s home inspection uncovers issues such as damages or needed repairs, the seller may refuse to pay for all (or a portion) of these and thus effectively cancel the deal.
Financing Contingency: A common contingency is one that includes the ability to kill the deal in the event that the buyer cannot obtain the financing needed to cover the purchase price of the home.
Appraisal Contingency: Lenders always conduct their own appraisal in order to determine the amount of financing they are willing to provide to the buyer. If this comes back lower than expected and the buyer cannot afford the difference in cash out of pocket, they may need to negotiate for alternative payment options or a lower purchase price, both of which the seller can refuse and cancel the deal.
The Buyer Did Not Perform According to Contract Terms
A contract is a legally binding document. Failure by either party, including the buyer, to live up to their obligations under that agreement is called “breach of contract”. When a breach of contract occurs due to buyer action or inaction, the seller can legally back out of the purchase agreement.
The Appraisal Came Back Low
As previously touched upon, the appraisal of the home plays a big role in whether or not the deal moves forward, and is a major reason why a seller might back out. Unexpectedly low appraisals (especially in a seller’s market or one that is on the rise), could be all that’s needed for a seller to back out. Remember, a buyer’s offer is usually based on a presumption that they can get financed for the entire amount offered. When they can’t, often due to a lower bank appraisal, many buyers can’t make up the difference in price out of pocket.
The Buyer Requests Too Many Home Inspection Repairs
It’s not unusual for a buyer to request a repair or update here or there. These are generally small repairs or minor upgrades that can be easily handled by the seller. However, some people are downright unreasonable, coming back at the seller with an increasing amount of demands. At some point, the cost-value ratio of making these repairs to satisfy that particular buyer might not be worth it. This is especially true if the home is marketable and has had multiple offers. In such cases, the seller may opt to back out of the deal due to the inconvenience and cost.
Pay Off The Buyer
Sellers wanting to back out of a deal without any legal means to do so may want to explore risk mitigation techniques such as “paying off the buyer”. Always consult with legal counsel with taking this route in order to have all of your bases covered.
This method involves approaching the buyer and negotiating a fee in exchange for cancelling the deal. This separate agreement should be in writing and signed by both parties to avoid a future lawsuit for damages.
What Happens If The Seller Backs Out Before Closing?
Backing out of a deal prior to closing often carries with it several risks that could impact you financially as a seller.
Buyer Sues for Specific Performance
A buyer may sue for what is known as “specific performance”. This suit is filed on the basis that the seller did not fulfill his or her legally binding obligations or duties under the signed purchase agreement.
In order to sue for specific performance, a buyer must demonstrate that they had acquired proper financing in order to fund the purchase.
If a court’s finding is in favor of the buyer, it can mandate that the seller transfers ownership of the home to the buyer in accordance with the original terms of the purchase agreement.
Buyers suing for specific performance may also file a “notice of pendency” in order to prevent the seller from selling or transferring the property to another party whilst the lawsuit is ongoing.
Buyer Sues for Damages
When a buyer sues for damages, they are seeking financial compensation for loss of time and money.
Damages Sought for Breach of Contract Often Include Compensation for:
- Legal fees
- Inspection fees
- Temporary housing costs
- Storage expenses
- Lost deposits
- HOA application fees
- And more…
Listing Agent Sues for Compensation
As a seller, when you cancel a deal, you not only end up in breach of contract with the prospective buyer, but also as it relates to your “seller’s agreement” with your listing agent.
In the event that you opt to cancel the contract with your real estate agent prior to closing, they may sue you in order to recoup lost costs (such as those for marketing the property). They can also sue for lost commission (upwards of 4-8% of the previously agreed to sales price).
How Can a Seller Avoid Fees When Backing Out of a Contract?
Appeal to the Buyers Emotions
Despite the potential for disappointment, buyers are humans too. Appeal to their humanity and help them understand the difficult position you’re in and how that may impact your life in a negative way.
Consider writing a heartfelt letter highlighting unforeseen circumstances and the potential for financial or other hardship you may face should the deal proceed. If your situation is temporary, consider offering the possibility of a sale at a future date.
Have Contingencies In the Contract
Nothing can protect you from fees, liability and lawsuits like a properly written contract can. Always err on the side of caution and have your purchase agreement amended by a real estate attorney to include contingencies and verbiage that allows you to back out of the sale without recourse for any reason that may be important to you.
Consult your Attorney
Before taking any action, always consult with a real estate attorney to minimize risk and explore opportunities. A good attorney will help you find solutions that put you in the best position possible to back out of the sale while minimizing fees and liability.
Think it Through to Make Right Decision
One of the most important things you can do is to take a step back from the situation and evaluate it with an even head. Consider an exercise as simple as a pros and cons list where you weight those aspects from most important to least.
Using this, along with advice from your lawyer, you can then take the next step with confidence.
Final Thoughts On Backing Out Of A Contract As A Seller
Selling a home is a big life decision. Despite planning ahead and making all the right moves, circumstances may arise that have you rethinking your decision. When this happens, you must proceed with caution as you could be held liable for breach of contract or other damages. In some cases, you may even be required by law to proceed with the sale. However, there are steps you can take to reduce risk and work with the prospective buyer to find an amicable resolution that works for all parties involved.
Further Reading: Looking For More Home Selling Resources? Check These Articles Out!
About the Author: Kris Lippi is the owner of ISoldMyHouse.com, the broker of Get LISTED Realty and an official member of the Forbes Real Estate Council. He actively writes about real estate related topics such as buying and selling homes, how-to guides for around the house and home product recommendations. He has been featured in Inman, Readers Digest, Fox News, American Express, Fit Small Business, Policy Genius, Lending Tree, GoDaddy, Manta as well as other major websites. Read more about us here.