In today’s competitive housing market, available homes fly off the shelves if you don’t act fast.
Nearly half of homes were on the market for as little as a week before going into pending status in the Spring of 2021, according to Zillow. Fueled by high demand and low inventory, that momentum is expected to continue as we draw closer to this 2022 Spring homebuying season.
With offers flying in, buyers and sellers often don’t have a lot of time to think about the terms of complicated contracts. There’s pressure to sign agreements to get a house sold, and sometimes, things slip through that cause a buyer or seller to reconsider their offer.
What happens if a buyer or seller changes their mind about purchasing a home? It depends on how far you’ve gotten in the process — and what contingencies are in place. Therefore, thinking about your possible exit from the beginning is wise — whether you’re on the buying or selling side.
After all, deals fall apart all the time, especially in real estate.
Before we begin, let’s review some key terms that are standard in every real estate deal.
Home Purchase Agreement: A legally binding agreement between a seller and buyer for the sale and purchase of a property that defines the terms of the real estate transaction.
Earnest Money: Funds made as a deposit to a seller to represent a buyer’s intention to purchase a home. Also known as a good faith deposit.
Escrow Account: An account managed by your mortgage servicer or title company where funds are kept for your real estate transaction.
Contingency: In a home purchase agreement, a contingency is a clause with certain conditions or actions that must be met by the seller or buyer to become legally binding, such as getting an inspection or securing financing.
Can a Buyer or Seller Back Out of Buying a House?
The short answer is yes, a buyer or seller can back out of a home sale. Usually, the buyer has more ways to back out of a deal, as it’s rare and more difficult for a seller to change their mind. When a house is for sale, buyers are the ones who present offers to sellers — and their offers usually include contingencies. Each contingency has a time frame.
“Most properties are sold as-is with rights to inspection,” says Kristen Conti, broker and owner at Florida real estate agency Peacock Premier Properties. “It gives the buyer the full ability at their sole discretion to say they don’t want to buy a house for any reason.”
If the buyer or seller doesn’t perform according to the terms of the offer contract, there may be consequences such as not being able to get earnest money returned, or in extreme circumstances, legal action that forces a party to carry out the action, including the sale of the property.
“The buyer has the most protection when walking away from a deal, as long as contingencies are in place,” explains Kristina Morales, Realtor at brokerage firm eXp Realty. “If they don’t have a contingency or have buyer’s remorse and decide at the last minute they don’t want to go through with the transaction, they risk losing their earnest money.”
The three major contingencies added to home purchase agreements are:
- Inspection contingency: This gives you the opportunity to do inspections and see if there is anything you didn’t realize was wrong with the property. It protects you from things you could not see with your own eyes, like something wrong behind the walls, with the water tank, or things of that nature,” says Morales.
- Appraisal contingency: This says that if a home doesn’t appraise for the sale price, the buyer has the option to walk away or renegotiate with the seller.
- Financing contingency: Gives you the option to back out if you can’t get financing for a home loan.
There are other contingencies you can add, but the above are most common. In the current white-hot market, buyers are waiving contingencies more often, especially inspection contingencies. And with cash deals, appraisal and financing contingencies aren’t needed. If you’re willing to waive a contingency as a buyer, your offer could be more attractive to a seller, but you’ll accept all the risks of unseen damage or urgent repairs.
The major contingencies for sellers are:
- Home sale: A home sale contingency means the seller intends to purchase another home and will only sell their current home if they’re able to buy the other one.
- Lease back: In this scenario, a seller might be waiting for another home to close or have something else going on in their lives that makes it necessary to sell their current home but stay in it. This situation would create a lease back contingency where buyers buy the home and let the seller stay in it for a predetermined amount of time.
That said, sellers generally won’t have as many (or any) contingencies as buyers.
Risks and Penalties for Backing Out of a Home Purchase Agreement
Despite having a home purchase agreement, earnest money, and contingencies in place, both buyers and sellers can back out of purchasing or selling a home. As mentioned earlier, buyers are the ones who most often walk away from a real estate transaction. In doing so, there may be risks and penalties, especially if they haven’t met the terms of their contract.
Typically, contingencies are time-bound, meaning their actions must be carried out by an agreed-upon date. For example, if your inspection contingency is for seven days, but you don’t get an inspection until the tenth day, you’ve effectively voided the contingency because you didn’t perform in the allotted time frame. If you were to back out, you wouldn’t get your deposit or earnest money returned.
The best way to navigate contingencies is to carefully track the dates and perform whatever tasks are needed, such as getting an inspection, survey, or appraisal, within the time you have. If you don’t, you’ll likely forfeit any funds you’ve already put toward the deal. Earnest money and deposits are held in an escrow account. Once you back out, those funds are released to the seller if you haven’t performed them.
However, if you get your inspections, appraisals, and financing within the agreed-upon date range and choose to back out, there are no penalties. For example, if you get an inspection done within the inspection contingency period and find material facts that you’re unwilling to overcome, you can back out risk-free and get your earnest money returned.
For both buyer and seller, carefully track the dates on a home purchase agreement related to contingencies. If either party doesn’t perform, it could be a reason to cancel the contract.
“I have only had a seller back out twice in 28 years of practice,” says Conti. “The buyer would have the right to sue for specific performance or damages. Once you’ve signed a legally binding contract, you don’t get to just change your mind.”
“It’s rare to see a seller back out,” adds Morales. “The buyer can sue the seller to close. But then you have the cost of defending yourself in a legal situation. Then in court, a judge will decide what happens.” That’s why, as a seller, it’s important to be 100% sure you accept the offer before you sign the contract.
When It Could Makes Sense to Back Out of a Home Purchase
There are many reasons why a buyer might back out of selling a home.
Inspection and Negotiation on Repairs
The biggest hurdle to clear is the initial inspections. This includes a standard inspection, but can also include separate inspections for HVAC systems, the sewer line, termites, radon, lead paint, asbestos, and mold. A buyer can also order a survey to make sure they’re getting all of the advertised lot and that there aren’t any easements. These are all issues that can’t be seen with the naked eye, so inspections are a good idea.
Within all of these inspections, if material information is discovered that a buyer doesn’t want to deal with or can’t be negotiated, the buyer can decide to walk away.
Other reasons to back out are discovering a clouded title. This is when the home’s title has a defect and is not deemed clear and marketable. Common title defects include public records errors, unknown liens, forgery, unknown easements, and disputes over land boundaries.
If the selling property is appraised lower than the asking price a contract could be terminated if: There isn’t an appraisal contingency waiver in place or neither party can come to an agreement on a new selling price.
If the buyer’s financing falls through, this could be a good reason to back out of a home purchase agreement.
Most of these situations pop up when a buyer is getting financing from a mortgage lender who often has their own set of criteria. For example, if the roof is old or the property is in a flood zone, the buyer may have a tough time getting home insurance or discover that flood insurance is very expensive.
If these situations happen within the contingency period, you can walk away without giving a reason. Keep a close eye on your contingency dates though, so you don’t get faulted on a technicality in case you run into an issue you don’t want to deal with.
Expert Advice to Protect Yourself From Risk
- Read and understand your contract before signing: “The real value for buyers is getting educated about the contract and the obligation to perform. If you’re not performing, the seller can request to end the contract,” says Morales. For both buyer and seller, a real estate agent can guide you through the contract every step of the way.
- Add contingencies: It’s extremely rare to find a home purchase agreement without contingencies outside of a cash deal. As a buyer, consider adding contingencies for inspection, appraisal, and financing so you can protect yourself as you move toward closing.
- Review proof of funds: “If you’re a seller, review the buyer’s proof of funds, whether it’s a preapproval or a cash statement,” advises Conti. This prevents you from getting into a situation where you accept an offer only to find the buyer isn’t actually qualified for a mortgage or has their money tied up elsewhere.
- Earnest money guarantee: If you’re a seller, get a deposit for a home purchase. If you’re a buyer, be willing to put down earnest money to demonstrate good faith with intent to purchase. The typical amount is 1% of the sale price, but can be as much as 3% in hot markets.