Canceling a Real Estate Contract: Guidelines, Risks, Consequences

  • If you make an offer on a home, a real estate contract details the terms and conditions of the sale.
  • Sometimes buyers need to cancel the contract due to financial challenges or problems with the house.
  • The consequences of canceling a contract depend on whether or not there are contingencies in place.

Most people who make an offer to buy a home do so fully intending to see the deal through to completion. But things happen, and home purchase agreements occasionally fall through.

Rising interest rates, affordability challenges, and even problems with the home itself can make the purchase less attractive than when you initially decided you wanted it. But before backing out of your contract, it’s important to understand the potential financial and legal consequences.

What is a real estate contract?

A real estate contract is a legally binding agreement outlining the terms and conditions of a real estate transaction. When a buyer wants to purchase a new home, their agent sends an offer letter detailing the proposed terms.

A real estate contract usually includes the following details:

  • Buyer and seller information
  • Property details
  • Price of the home
  • Financing information
  • Earnest money deposit
  • Any contingencies under which the sale can be terminated
  • Estimated closing and possession dates

If the seller accepts the buyer’s offer, the house is officially under contract, and both parties will sign the home purchase agreement.

Can a buyer cancel a real estate contract?

Both the buyer and the seller can back out of a home purchase agreement, though buyers usually have more options. How easy it is to back out of a purchase agreement typically depends on the wording used in the contract.

And there may be financial consequences for canceling a real estate contract. For instance, you risk losing your earnest money unless there are contingencies in place that protect you.

When canceling a home purchase agreement can make sense

According to Hayley Tomazic, real estate broker and founder of Curated Properties, there are many reasons someone may need to cancel their home purchase. One reason contracts are often canceled is because of a failed home inspection.

“If the buyer finds something material regarding the home such as a structural deficiency they were unaware of, they may choose to cancel,” she explains.

Buyers may also need to cancel the contract if they lose their job or are unable to obtain financing. The buyer could also be forced to cancel the contract if the home doesn’t appraise at the agreed-upon price.

Backing out of a deal with contingencies

As a buyer, it’s easiest to back out of a home purchase due to unmet contingencies. The following contingencies are commonly included in a home purchase contract:

  • Financing: A financing contingency allows you to back out of the purchase if your financing falls through. For instance, if you lose your job and your financing falls through, you’re no longer able to buy the house.
  • Home inspection: This contingency allows you to back out of the sale if the home inspection uncovers any problems with the house. You can either renegotiate the price, ask the seller to make improvements, or walk away altogether.
  • Appraisal: If the home appraisal comes back lower than the amount you offered, you can back out of the purchase.
  • Selling your current home: Some buyers will have a contingency stating the purchases can only occur after they sell their existing home.
  • Titles: Your mortgage lender will require a title search before closing to ensure there are no problems with the property. If the title search reveals an ownership dispute, you have grounds to walk away.

Backing out of a sale with no contingencies

When the market favors sellers, some homebuyers may waive contingencies to make their offer more competitive. While this can occasionally work out in your favor, waiving contingencies comes with repercussions if you want to back out of your contract.

For instance, you’ll lose any earnest money you put down on the home. You’ll also lose any money you’ve already spent on services like a title search or home inspection.

When is it too late to cancel a home purchase contract?

According to Tomazic, it’s too late to cancel the contract once all contingencies are resolved. If you do cancel your contract, the seller can either release you from the sale contract or sue you for specific performance.

And once you’ve closed on the property, you’re the new owner. “If you were to discover serious problems that were not disclosed, you may have an opportunity to sue the former owner for not disclosing material issues, but you can no longer cancel the contract at this point,” Tomazic said.

estate contract?” id=”what-are-the-consequences-of-backing-out-of-a-real-estate-contract?”>What are the consequences of backing out of a real estate contract?

As a buyer, you stand to lose the most financially if you back out of a real estate contract, especially if there are no contingencies in place. You’ll lose your earnest money and any money you’ve spent on an appraisal, home inspection, or other services.

For seller, the real risk is “the financial consequences of having to go back on the market are unknown,” Tomazic says. “They may not attract the same amount of interest after returning and secure a lower sale price with worse terms.”

And depending on the wording in the contract, the buyer could take the seller to court if they feel the reasons for canceling the contract weren’t justified.

The bottom line

Buying a home is a big investment, and you want to ensure it’s the right decision for you and your family. If you’ve suffered a job loss or are concerned about problems with the house, walking away could be the right choice.

If you’re considering making an offer on a home, it’s important to include certain contingencies in the contract. Things come up, and real estate contracts fall through, “which is the reason contracts have contingencies in place that allow them to cancel,” Tomazic says.

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