Ask an expert: Seller Breaking a Real Estate Contract
You’ve saved up cash for a down payment, been pre-approved for a mortgage, and found a home you love. Most would agree that you’ve crossed the biggest hurdles on the way to homeownership. But even though you’ve signed a contract and are moving toward closing on your new home, surprises may still lie ahead.
There’s always the possibility that the seller — for any number of reasons — could back out of the deal. So what are the consequences of breaking a real estate contract? And is your down payment lost forever? It all depends on your state’s real estate laws, what’s in the contract and whether the seller actually violated it.
We tapped the experts to get some insider information on exactly what happens when a home seller breaks a real estate contract. Here’s what you need to know.
- Can a seller back out of a real estate contract?
- Other reasons sellers back out of the deal
- Did the seller just break our real estate contract?
- Consequences for a seller who breaches a real estate contract
- Some parting thoughts
Can a seller back out of a real estate contract?
The short answer is yes, partly because the purchase agreement generally includes more than just the sale price and closing date. According to Rebecca Thomson, president of the Chicago Association of Realtors, most real estate contracts also include contingencies. A common example is a financing contingency deadline setting a specific date for the buyer to lock down a mortgage loan — if the buyer fails to meet it, the seller can back out without penalty.
Thomson worked with a seller recently who ended up getting cold feet, which isn’t exactly reason enough to break a contract. But when the buyer asked for an extension on the financing contingency, the seller upheld the original agreement, effectively canceling the contract.
“The seller found herself in a position where she was able to cancel the deal, and her attorney affirmed that she was within her rights to decline the extension and get out of the deal penalty-free,” Thomson told LendingTree.
Home inspections are another common contingency, according to the National Association of Realtors (NAR). If the buyer comes back afterward with a laundry list of repairs to be made, the seller may not be under any obligation to make them. If the buyer walks away from the deal, the seller never actually breached the contract. And there are times when this situation is to a seller’s benefit — if another buyer makes a better offer, the seller may simply refuse to make the first buyer’s repairs.
“It’s a roundabout way to ‘break’ the contract by prompting the buyer to walk away,” said Thomson. “The buyer may initially perceive this as the seller breaching the contract, but they’re actually within their rights.”
Problems with home inspections were the top reason real estate contracts were terminated last year, the NAR reports, though the vast majority of deals go through. In May, just 5% of deals were dissolved.
Your best protection here is to read through the contract with a close eye, preferably with the help of a real estate attorney, before signing on the dotted line. Is there language in there stating that the seller can break the agreement if they’re, say, unable to find a new place to live prior to the sale? If so, it represents an easy out for the seller, should they change their mind about selling the home.
Other reasons sellers back out of the deal
Nine times out of 10, it isn’t a change of heart that derails the homebuying process. According to Leslie Feifer, a Long Island, New York-based real estate attorney, an unknown lien or judgment is sometimes the culprit. Translation: Something like federal tax liens, a creditor or bankruptcy judgment against the seller comes to light — if the seller doesn’t have clear title to the house, he or she can’t transfer ownership to the buyer.
Attorney review clause. Depending on the contract, the seller — or buyer, for that matter — may be able to pull out of the contract penalty-free during what’s called the attorney review period. This is a window that begins the day the contract is signed. It’s basically a time for attorneys on both sides to review the contract, and cancel it if it no longer meets their standards, or if one of the parties changes their mind.
Did the seller just break our real estate contract?
If your home purchase falls through, the first thing to clarify is whether the seller is actually in violation of the contract. Asking your real estate agent is a good place to start, but it ultimately may be in your best interest to seek the advice of a residential real estate attorney who understands your state’s unique laws.
Or, there may be a simpler way.
“In most states, both principals of the transaction can talk to one another; they don’t always have to go through a realtor,” said Thomson. “If things really get sticky, the buyer can pick up the phone and call the seller and have a calm conversation without pointing fingers. I’ve seen deals get ironed out with good old-fashioned kindness.”
As Thomson points out, on the other side of the deal is another person — an especially important thing to keep in mind when things get heated. This is precisely why she also recommends writing a personalized letter to the seller when making an initial offer that spotlights why you love the property and what living there will mean to you and your family. It helps humanize the transaction.
With that being said, it’s equally important to read any contract, line by line, to clarify any and all contingencies. For example, is the financial contingency deadline reasonable? That is to say, does it give you enough time to actually get your financing in order? Thomson suggests connecting with your lender about the timeline before signing, just to be safe. If you sign and agree that you only have so many days to do an inspection, waiting until the eleventh hour will make it much harder to work through any surprises that an inspection may uncover.
Consequences for a seller who breaches a real estate contract
A real estate contract is a legally binding document, so if the seller breaks it in a way that’s not covered by an included contingency, they are indeed violating it. Specific repercussions depend on state-specific real estate laws, but Feifer says the seller can’t just keep the down payment, formally known as “earnest money.”
When a buyer makes an offer on a house, some or all of their down payment is held in what’s called an escrow account until the deal closes. If the seller breaks a real estate contract, the buyer is entitled to get it back, but if a dispute over the money ensues, the deposit will stay in escrow until it’s resolved.
“The escrow agent has to abide by whatever the contract said when it comes to releasing that money, but if the seller makes an objection, it may then be deposited into court and things get complicated,” said Feifer.
Fighting over the down payment in court is both costly and time intensive, which is why it may be worth negotiating a deal privately. This may include alternatives like arbitration or mediation, each of which brings in an objective third party to help find a resolution. Feifer says people are usually drawn to these options in order to save on legal fees, but they typically take a long time. And while a mediator’s final recommendations aren’t legally enforceable, a binding arbitration cannot be overturned.
If the seller indeed breached the contract and the buyer is set on taking it to the courts, Feifer says the buyer may have grounds to recover financial losses related to the contract falling through, like inspection fees, costs associated with having to find short-term housing, and so on. Recovering legal fees may also be on the table if the contract says this is indeed a remedy.
In extreme cases — again, depending on the language of the original contract — the court may rule that the seller complete the home sale as previously agreed upon. This likely will be anything but speedy, and the buyer may have to pony up for legal fees.
Some parting thoughts
Making sense of the consequences of breaking a real estate contract isn’t always easy. The language of each individual agreement is different, which is why it’s never wise to sign it until you thoroughly understand what you’re getting yourself into. A home sale is a huge financial transaction for both parties, and while Feifer says it isn’t terribly common for a seller to back out of the deal, it does happen.
The first step for the buyer is to understand if the seller indeed breached the contract — in some cases, the seller may be protected by specific contingencies that were written into the original contract. If, however, the seller did violate the agreement, the buyer can take legal action. Unless you’re a real estate attorney, it pays to seek out a professional to help you navigate these murky waters and protect your rights as a buyer.