- Can a Home Buyer Back Out After a Final Walkthrough? | Clever Real Estate
- Common Reasons for Backing Out
- How Much Time Do Buyers Have to Back Out?
- Consequences of Backing Out
- You May Also
- Can A Seller Back A Purchase Agreement?
- Ways A Seller Can Get A Purchase Agreement
- The contract Hasn’t Been Signed Yet
- Contract is Still in the Attorney Review Period
- Seller Has a Contingency Addendum in the Contract
- The Buyer Did Not Perform According to Contract Terms
- The Appraisal Came Back Low
- The Buyer Requests Too Many Home Inspection Repairs
- Pay Off The Buyer
- What Happens If The Seller Backs Out Before Closing?
- Buyer Sues for Specific Performance
- Buyer Sues for Damages
- Listing Agent Sues for Compensation
- Appeal to the Buyers Emotions
- Have Contingencies In the Contract
- Consult your Attorney
- Think it Through to Make Right Decision
- Final Thoughts On Backing A Contract As A Seller
- What The Seller Can Do After A Homebuyer Backs Out
- Decision time
- Who gets the deposit?
- Backup buyers
- New strategy
- New price
- What Happens When a Home Buyer Backs The Deal?
- Consequences of backing out
- Contingencies and backing out
- What About Cold Feet?
- Tips to protect yourself
Can a Home Buyer Back Out After a Final Walkthrough? | Clever Real Estate
Whether you’re buying or selling a home, you may wonder whether it’s possible to break a purchase agreement after the final walkthrough. While it’s always possible, there can be some serious consequences if it’s not done right. Here’s everything your need to know.
Buying a house is not something you should ever take lightly. And when you find the perfect home, you want to make sure it’s the one you’ll be living in for the long haul. But what happens when plans change, for whatever reason, and you can’t follow through with the purchase?
If you've agreed to buy a house and change your mind, you’re probably wondering if you can back out, and if there’s a time limit on your ability to get buying a home. The answer could depend on just how far into the home buying process you are before you want to reverse course.
Learn the consequences of backing out and avoid them with a Partner Agent.
Common Reasons for Backing Out
Can you back the deal after the final walkthrough of your would-be next home? The answer is yes. Buyers can back a sales contract, and sometimes, they do. According to the National Association of Realtors’ (NAR) Realtor Confidence Index for May 2018, surveyed realtors said an average of 5% of contracts were terminated before closing.
Usually, if a buyer lawfully backs a purchase agreement, it’s because something turned up during the home inspection. This is the most common reason for buyers to exit a real estate contract, and in most cases, there is a contingency allowing a buyer to exit if they aren’t satisfied with the inspection results.
Other common reasons for a buyer to walk from a purchase include being unable to secure financing, the results of a title survey, and an unexpected appraisal value. As long as these were clearly outlined in the contract, there should be no issues canceling the sale for any of these reasons.
How Much Time Do Buyers Have to Back Out?
When a sales contract is signed, most buyers put down a deposit which is also known as “earnest money.” This cash is typically between 1% and 10% of the total purchase price and is held in escrow until the closing. If a buyer pulls a sale, he or she may have to forfeit this deposit to the seller, but it depends on what contingencies are in the original contract.
If you applied for a personal loan to help finance your home, federal credit law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty. The Truth In Lending Act protects your “right to rescind” or “right to cancel,” until midnight of the third business day after the credit transaction.
Consequences of Backing Out
If the buyer cannot secure a mortgage or sell their previous homes within a set timeline, they have the option to back a home sale penalty-free, as long as the language is in the contract. If you want these contingencies, make sure you get them in writing.
Some situations, however, are not covered by contingencies, such as a buyer simply getting cold feet. If buyers change their mind about a particular house, or making the leap into homeownership, it will cost them. The seller will get to keep the deposit, and in rare cases, they could take it even further.
Buyers will be responsible for covering fees home inspections and appraisals, even if the sale is canceled before closing. Beyond a lost deposit and fees, there aren’t many other lasting consequences for a buyer who backs a home sale under the terms of the contract, but there is always potential for legal action from the seller.
Remember that a contract is legally binding. This means that if you break your end of the deal, you could be taken to court and be required to compensate any damages caused by your actions. These consequences could mean refunding the earnest money, or even compensating the buyer for storage and living expenses brought on by them expecting to have a house to live in.
The best way to avoid having to figure out how to get a contract is to make the right choice from the beginning. That’s where real estate agents come in: they can help ensure that the buying and selling process go so smoothly that you won’t even have to consider backing the deal.
When navigating the home buying or selling process, a good real estate agent can save you from some major headaches down the line, and offer guidance and support during home inspections and in negotiations.
You May Also
Can A Seller Back A Purchase Agreement?
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 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 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 the deal without any negative implications.
Common Reasons Sellers Opt to Back a Purchase Agreement
PRO TIP: Just because these reasons are common doesn’t mean that they make backing 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 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 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 A Purchase Agreement
Now that we know the underlying reasons behind why a seller might want to back 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 the deal.
New Home Contingency: This particular contingency gives the seller the right to back 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 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 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 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 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 the deal due to the inconvenience and cost.
Pay Off The Buyer
Sellers wanting to back 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 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).
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 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 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 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 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 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.
What The Seller Can Do After A Homebuyer Backs Out
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It’s a hard fact for home sellers, but not every deal closes. Sometimes the sellers cancel the contract themselves; more often, it’s the buyer who walks away.
Buyers back out for a variety of reasons, judging by a series of online member surveys by the National Association of Realtors.
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The 2015-16 survey found that 7% of the 3,596 Realtor respondents’ contracts from December 2015 to February 2016 ended in termination.
In the most recent period, 33% of the terminations were due to home inspection issues (e.g., defects in the home) and 21% were due to financing issues (e.g., buyers weren’t able to get a mortgage). Other problems included appraisal or title issues, other contract contingencies, buyers losing their jobs, and simple cold feet.
Regardless of the reason, a terminated deal leaves the seller with a hard decision: Give up or try again?
Linnette Edwards, broker/agent for My Housing Guide in the East Bay around Oakland, California, says sellers should “definitely” put their home back on the market.
“It’s discouraging and deflating,” Edwards says, “but you already got one offer. You’re going to get another.”
Seasonality can be a factor for some sellers, especially if they don’t have to move, says Wendy English, sales manager at Century 21 Commonwealth in Medfield, Massachusetts.
“There are a lot of sellers who, if their house isn’t sold by the 2nd week in November, will take it off for the holidays and try again in the new year,” English says.
Who gets the deposit?
Either way, the first priority is for the buyer and seller to sign a written contract cancellation and figure out who’s entitled to the buyer’s deposit.
Sellers might believe it should be theirs, but it’s rare that they get to keep it because most buyers who walk away do so within the time frame of a contingency that gives them an out, English explains.
If all of the contingencies have been removed, the seller might have a better shot at the deposit or a contractually determined break-out penalty, such as 3% of the purchase price.
The outcome depends on state law and how the contract is worded. If the resolution isn’t clear or a lot of money is involved, sellers might want to consult an attorney.
“The important thing to know is that you cannot officially remarket your home, take a new buyer and go into contract until you’ve received a cancellation of contract and settled the deposit,” Edwards says.
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A backup offer can soften the blow, but even that isn’t always a smooth and easy solution.
The backup might step into first position automatically or be subject to further negotiation, depending on state law and how the backup offer is worded.
And even if the backup seems solid, the 2nd buyer might back out, too.
“Until they hand over the keys, sellers do tend to be nervous about the whole process, especially if they need the sale to buy their next house,” English says.
Smart sellers keep their home as sale-ready as possible until all the contingencies are removed to ensure a good show for inspectors and the appraiser and in case the deal falls through.
If there’s no backup offer, sellers need to get the house back on the market as quickly as possible, English says.
Relisted homes may be denoted as “back on the market,” sometimes abbreviated “BOM” or “BOMK,” in the broker’s multiple-listing system (MLS).
Relisted homes can suffer from a stigma, even if the buyer’s decision to walk away wasn’t related to the home itself.
“Unfortunately, when a home is back on the market, buyers wonder what’s wrong with the property,” Edwards says. “They ask their buyer’s agent, ‘Why is this back on the market?'”
Such questions can “hurt you as a seller,” but you can try to protect yourself by making a disclosure such as “BOMK — no fault of the seller,” in the MLS, if that’s appropriate, she adds.
Whether a relisted home will sell for more or less than the original contracted price depends on market conditions and why the buyer walked away.
For example, if the buyer got cold feet after a bidding war, the new price might be lower. If the local market is on an upswing, the new price might be higher, English says.
If a newly discovered major defect was at fault, sellers can either remedy the problem or remarket the home with a disclosure. How that will effect the new price depends on how buyers perceive the home and the new information.
“If you have a foundation issue that’s going to cost $40,000, you either go back on the market with a price adjustment that makes sense to buyers or you do the repair if that makes even more sense to buyers,” Edwards says.
Sellers who received multiple offers should resist the temptation to relist at a higher price.
“Unfortunately, buyers perceive that as red flag. They see a home that’s back on the market and now they think there’s a crazy seller who wants more money for it,” Edwards says. “You need to let them do the bidding to get up to that price themselves.”
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What Happens When a Home Buyer Backs The Deal?
Backing a real estate transaction is not as uncommon as you might think. According to the National Association of REALTORS® (NAR) Realtor Confidence Index report, around 5% of real estate contracts are terminated before closing.
Usually, buyers terminate contracts because of problems with their financing, unexpected home inspection results or appraisal issues. So, what happens when a buyer backs out? Let’s lay it all out:
Source: (Benjamin Child/ Unsplash)
Consequences of backing out
While a buyer can legally back a home contract, there can be consequences for doing so. For example, you can lose your earnest money, which could amount to thousands of dollars or more.
That is unless your reason for pulling the deal is stipulated in your contract.
Earnest money is used to show that the buyer is going into the contract in good faith. The money is held in an escrow account until closing by a third party such as a title company.
If you back the deal and do so for a reason that was not explicitly included in the contract, you could be out your earnest money.
Contingencies and backing out
Contingencies are basically clauses in real estate contracts that lay out conditions for the contract’s completion. Contingencies exist because there are a lot of unknowns in both buying and selling a home.
A buyer usually doesn’t know how the home inspection will turn out when they put in an offer. wise, the seller usually doesn’t know if the buyer will be able to secure proper financing when they accept an offer.
Contract contingencies protect both parties from these unknowns. Most real estate contracts include contingencies that protect both the buyer’s and seller’s interests.
The most common contingencies in real estate contracts are:
- Home inspection
- Getting an acceptable appraisal
If you back a contract, but you’re protected by a contingency, your earnest money should be safe. Further, state laws can also protect buyers in real estate transactions.
Ultimately, it always depends on the terms of your individual contract and the laws of the state where you’re doing business.
Make sure you thoroughly understand your contract before signing. If you have questions about your contingencies, ask your real estate agent or lawyer for further guidance.
Source: (Nicholas Kampouris/ Unsplash)
What About Cold Feet?
Much of the time, when buyers back out for good faith reasons, they’re covered by the contract.
Unfortunately, the vast majority of contracts don’t have a “cold feet” opt-out. Keep that in mind before you put down your earnest money.
If you back out because of cold feet, you’ll ly lose your deposit. And if you’re buying in a pricey market, that could amount to tens of thousands of dollars.
Tips to protect yourself
It’s always important to protect yourself when it comes to entering into—or backing —a real estate contract. Here are a few tips to help:
- Read your contract thoroughly before signing. Make sure to pay special attention to contingencies.
- Use a lender with an earnest money guarantee. Compare lenders and find out if any of your options offer an earnest money guarantee.
- Pay attention to contract timelines. Contingencies often have timelines. For example, a contract might stipulate that the seller has up to 10 days after the home inspection to fix any defects. If the defects aren’t fixed in time, the buyer has the right to walk away with their deposit money. Make sure you understand these timelines before entering into your contract.
- Know your state law. Each state has its own law governing contracts. Your state’s law can affect your real estate transaction. For example, in Illinois, there is a short period of time after signing a contract where either party can review with an attorney and cancel the deal. Do a little research into your state’s contract law to find out what protections you might have as a buyer.
Entering into a purchase contract to buy a home is one of the biggest decisions a person can make and shouldn’t be taken lightly.
We recommend contacting a real estate professional or attorney with any questions you may have in relation to the purchase of a home.
Header Image Source: (Isabela Kronemberger/ Unsplash)