When Can The Seller Back Out Of A Contract?
When your offer to buy a home is accepted, it’s the culmination of all your hard work and the start of a significant financial and legal transaction. It’s an exciting moment, but it’s not a done deal until the final papers are signed. That means the seller can back out of the contract, though there may be legal consequences if they do so in a way that violates the contract terms.
Key Takeaways:
- Homeowners may want to back out of a deal to sell their home for a number of reasons, including receiving a higher offer, an inability to buy a new home, or they just plain changed their minds.
- The buyer can sue a seller who cancels a home sale in a way not allowed by the purchase and sale contract.
- It’s always a good idea to consult with a real estate attorney before deciding to cancel a sale you’ve agreed to.
Can A Seller Back Out Of A Real Estate Contract?
Yes, a seller can back out of a real estate purchase and sale agreement. However, the seller will need a legitimate legal or contractual reason to cancel a home sale. If they cancel the sale without cause, the buyer may be able to take legal action to force the seller to complete the transaction or compensate them for their time and money.
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6 Reasons Why Sellers May Want To Cancel A Home Sale
Once you sign an agreement to sell your home, it’s a binding legal contract. Most sellers understand they need to be sure they’re happy with the deal before they sign it. However, there are times when they decide to cancel a sale after signing the contract.
1. They Receive A Higher Offer
One of the most common reasons someone may want to back out of a deal to sell their home is they receive a higher offer. It’s natural to pursue the best deal possible, so a seller who gets a better offer may look for a way to cancel the current sale and accept a higher offer.
2. They’re Unable To Find a New Home
Everyone needs a place to live, including people selling their homes. If a seller is struggling to find a new home to buy or a place to rent, they may try to back out of their deal rather than find themselves with nowhere to live.
3. Their Circumstances Change
Unexpected or sudden life events can be another reason sellers may try to cancel a sale. One example would be a family moving to accept a new job only to have the employer rescind the offer after they’ve sold their home. A sudden illness in the family also could change a seller’s priorities and cause them to reconsider the sale.
4. They Have Strong Emotional Ties To The Home
A 2018 study found that the average duration of homeownership in the United States was 13 years. That’s enough time to start a family and raise children through at least middle school. The reality of leaving the home where you’ve made so many memories may not sink in fully until after you’ve agreed to sell your home. Such sellers may have second thoughts about selling and want to back out of a contract.
5. The Family Disagrees About The Sale
Selling a home is a significant decision, so it’s not unusual for family members to have different opinions about it. Family arguments could complicate a sale and prompt the seller to cancel the deal.
6. The Appraisal Is Higher Than Sale Price
The buyer’s lender typically requires a home appraisal before approving their mortgage application. A home that appraises for more than the sale price may be worth more than the seller agreed to accept. Thinking they failed to get the best deal possible for their home can prompt them to rethink their agreement to sell.
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5 Times When The Seller Can Cancel A Sale
Whatever the reason a seller may have for canceling a sale, there are times when they can do so without penalty.
1. Before Signing the Contract
If the seller has agreed to a preliminary proposal but has not yet signed the purchase and sale agreement, they can cancel it. Generally, there aren’t consequences for canceling the sale if there isn’t a written contract.
2. The Sale Contingency Is Unmet
If the contract includes a sale contingency, the seller can cancel the deal if they cannot find a new home to buy by a specific deadline.
3. During The Attorney Review
Some states require real estate contracts to be reviewed by an attorney before they take effect. This typically is a set time after signing for both parties to have an attorney review the agreement. If either side decides during this period that they want to cancel the sale, they typically can do so without penalty.
4. If The Buyer Breaks The Contract
If the buyer fails to fulfill their obligations under the contract, the seller can cancel the sale. Common ways a buyer could cancel the contract include:
- They fail to get financing. Roughly 80% of home buyers use financing to buy a home, typically in the form of a mortgage. For that reason, most offers to buy a home include a financing contingency, which states that the buyer will purchase the home so long as they can secure a mortgage. If the buyer fails to qualify for a loan to buy the home, the seller can back out of the sale.
- They’re unhappy with the home inspection. Many homebuyers include an inspection contingency, letting them hire a professional inspector to examine the property, confirm that it’s in good condition, and ensure that there are no major structural problems that could cause issues down the road. If the inspection turns up problems and the contract includes an inspection contingency, the buyers may wish to back out, giving the seller a chance to cancel the sale.
- The home appraises for less than the sale price. Some home purchase offers contain an appraisal contingency. This lets the buyer back out of the deal if the home doesn’t appraise for the amount they offered. Often, a low appraisal can also cause issues with financing, as banks aren’t willing to provide a loan if the home isn’t worth enough to serve as collateral. That means a low appraisal could give the buyer pause and the seller a chance to cancel the sale.
5. By Asking The Buyer To Cancel
The seller also may simply ask the buyer to cancel the transaction. So long as both parties agree, there won’t be negative consequences. However, the buyer is not obligated to agree if the contract has been signed and their contingencies have been met.
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Consequences Of Canceling a Contract Without Cause
Backing out of a contract can have financial and legal consequences. Buyers who back out without cause typically forfeit their earnest money deposit, and the seller could bring legal action.
If the seller cancels the contract without cause, the buyer could sue the seller to force them to complete the sale. They also could seek financial damages.
Consequences Of Canceling A Real Estate Contract
| Scenario | Consequences |
|---|---|
| The seller backs out legally with contingencies. | No penalties; the buyer typically gets their deposit back. |
| The seller backs out without legal grounds. | May be sued for breach of contract and may forfeit the earnest money deposit. |
| The seller attempts to cancel due to a higher offer. | The buyer can take legal action or enforce the contract. |
| Seller cancels after buyer breaches contract. | May keep the buyer’s deposit and avoid penalties. |
| Mutual agreement to cancel. | No penalties if both parties agree. |
| Real estate agent involvement. | The seller may still owe a commission to the listing agent, depending on the terms of the agent’s contract. |
You’ll Have To Refund The Earnest Money Deposit
If you’re selling your home and try to back out of the sale without cause, you’ll have to refund the buyer’s earnest money deposit.
The Buyer May Bring Legal Action
If you back out without cause, the buyer can bring legal action for breach of contract. That means you could be facing a lawsuit where the buyer seeks compensation. Depending on the buyer, the lawsuit may seek financial compensation or even specific performance, forcing you to sell your home.
You May Have To Pay The Buyer
Depending on the result of the lawsuit, you may have to compensate the buyer. That means you could owe more money to the buyer in addition to having to return the earnest money deposit.
3 Steps To Cancel A Real Estate Contact
If you’re considering canceling a real estate contract, follow these steps to limit your risk.
1. Consult An Attorney
In any situation involving contracts, it’s a good idea to consult a legal professional.
A real estate attorney can help determine any legal grounds for canceling the contract. You may find something in the agreement that lets you out of it.
Additionally, an attorney can explain your options and advise you on how to move forward.
2. Notify The Buyer
The next step is to inform the home buyer that you want to cancel the sale. If you have a legal reason for doing so, notify the buyer of the specific parts of the contract that give you the right to cancel the transaction.
If you don’t have a contractual reason to cancel the sale, it’s worth asking the buyer if they’re willing to cancel the transaction by mutual agreement. If not, let the buyer know you plan to cancel the sale anyway. Just be prepared for the consequences of doing so.
3. Consider Offering Compensation
If you’re backing out of a sale without a legal reason, there’s a chance the buyer could pursue legal action.
If you’re concerned that the buyer may bring legal action, you may want to compensate the buyer somehow to avoid legal action.
If you go this route, work with a lawyer to draft a document outlining the compensation and confirming that the buyer won’t bring further legal action against you.
FAQ
Here are answers to common questions about when a seller can back out of a sale.
The Bottom Line
If you’re uncertain about selling your house, take time to step back and review your options. Consider whether a conversation with the potential buyer or a qualified legal professional should be in order. If you decide to back out of an agreement, try to understand how your decision will affect all parties involved. If the buyer has done everything to prove financial stability – and held to their end of the agreement – you’ll need to try to resolve the situation fairly.
Hanna Kielar contributed to the reporting of this article.
