How to get out of a real estate contract

Peter WardenThe Mortgage Reports Contributor

When you want out of your home purchase

If you’re getting cold feet about a property purchase, you may want to know how to get out of a real estate contract. There are a few ways:

  1. Contingencies (your contract should give you several opportunities to cancel it, including inspections, your financing falling through, title issues, or you need to sell your current home)
  2. You may be able to kill a sale if an HOA is involved and you get out early (by law, you get time to approve the rules of the community or kill the deal)
  3. You may choose to back out and forfeit your earnest money deposit
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When it’s easy to back out of an offer to buy a home

There’s absolutely no problem with your backing out of a deal before everyone’s signed the contract. “Everyone” means all the people buying and all the people selling.

If the home is currently owned jointly and you’re buying it jointly then there will have to be at least four signatures before the agreement becomes binding. Only at that point, will you be “in contract.”

In some states, your original offer takes the form of a contract that you sign when you decide to buy. Be careful — it becomes binding as soon as the seller signs it.

In other states, it’s usual for the buyer to make a written offer that is not a contract. The seller responds with a draft purchase agreement (a.k.a. sales contract). You’ll only be bound when you sign that second document.

What do today’s homebuyers want in their real estate agents?

The HOA get out

When you buy a condo or a home governed by a homeowners’ association (HOA), the seller must provide you with all the paperwork you need to understand what your relationship with that association entails. Lawyers call this a Declaration of Covenants, Conditions and Restrictions (CC&Rs).

It can be pretty dense stuff, including budgets, by-laws, board meetings and other things that don’t begin with B. You’ll almost certainly have a period of time to digest the contents of that bundle. Exactly how long you have will depend on your state’s laws, but expect anything between a weekend and a week.

During that time, you’re normally able to walk away from your deal, with no questions asked, even though you are under contract. You don’t even have to read the documents.

Are HOA dues making real estate unaffordable?

Once you’re in contract and your HOA grace period (if you had one) has expired, you may still be able to back out of an offer to buy a home. But it may be less easy or more expensive.

Contingencies

If you want to know how to get out of a real estate contract, you need to understand contingencies. These clauses describe situations in which you have a right to withdraw from the contract without penalty. However, unlike the HOA get-out, you may have to prove that you’re eligible to invoke a clause.

Clauses that are often included in purchase agreements include the right for a buyer to withdraw if:

  1. Your financing falls through
  2. The home inspection reveals significant issues
  3. The appraisal falls short
  4. Your own home fails to sell within a certain period
  5. There’s an undisclosed easement (your title search reveals someone else has rights to use your property)
  6. There’s a problem with the title
  7. Insurers refuse to cover the home because it’s in a high-risk place for earthquakes/hurricanes/mold/pests or whatever

Contingencies aren’t always automatically included in contracts. So you must ensure the ones you think you may need to get added before you sign. And you must make sure any deadlines that limit a contingency give you the time you need.

Contingencies and purchase negotiations

Contingencies form part of the negotiation you or your agent have with the seller. You quibble about those at the same time you argue about the price, the closing date and whether those darling curtains in the master bedroom will stay.

Is it safe to waive real estate contingencies when you buy a house?

The more contingencies you demand, the less likely your seller is to take your offer seriously. This can become an issue if you’re in competition with other prospective purchasers.

You can see why a seller might prefer a “clean” offer (one few or no contingencies) over a conditional one, even if the latter offer is higher. As the old proverb says, a bird in the hand is worth more than one with numerous rights to fly away.

What it can cost to back out of an offer to buy a home

In the absence of an applicable contingency, trying to back out of a purchase contract will likely cost you. Theoretically, your seller may even be able to sue you for “specific performance.” That’s the obtaining of a court order that requires you to fulfill your obligations under the contract.

In other words, an order that makes you close on the deal, as promised. If you don’t or can’t, you might owe the sellers for all the direct and consequential losses they suffer— and then some.

10 reasons your home purchase didn’t go through

In practice, specific performance orders are very rare. They are more likely to come into play when a seller tries to back out and the buyer forces the issue. Instead, most offers include “earnest money,” a substantial deposit that the buyer provides to compensate the seller for taking the property off the market.

If you back out without a qualified reason, you may lose some or all of your earnest money. Part of your negotiation to buy the house includes the amount of earnest money you put up.

Sellers are people

Sellers are people, too. Treat them that way!

They can be resentful or even petty if they think someone’s stringing them along. Equally, they can be kind or even generous to someone who’s having problems.

Play nicely

Your best hope of backing out of your deal unscathed is to act quickly and honorably. Tell your sellers the moment you know you won’t be able to proceed. That minimizes their costs and maximizes the time they have to find a new buyer.

Similarly, be upfront about your reason for pulling out, assuming it’s a good one. Many sellers will be understanding if you lose your job or have to relocate to look after an ill parent. But you can’t expect sympathy if your offer was always just a back-up while you continued to search for a better home.

Homebuying should not be an entirely adversarial process. Yes, there are negotiations, but everyone should pretty much want the same thing — a transfer of property for an agreed-upon price. And fortunately, most transactions do conclude and are conducted fairly.

Verify your new rate (Jul 19th, 2018)