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Can a Seller Cancel a Real Estate Contract?
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A home seller can cancel a real estate contract, though there may be consequences for doing so. It depends on your local real estate laws, what’s in the contract and whether the seller violated the terms.
Making sense of the consequences of terminating a real estate contract can be complicated, which is why it’s never wise to sign an agreement until you thoroughly understand what you’re getting into as a homebuyer or a seller.
Can a seller cancel a real estate contract?
The short answer: Yes, there are circumstances under which a seller can back out of a contract.
Both homebuyers and home sellers typically have contingencies — contract clauses that spell out which conditions must be met for the home sale to happen — that can give them the opportunity to walk away from a transaction.
A financing contingency is a common example. If the buyer isn’t approved for a mortgage by the deadline specified in the contract, the seller can back out without penalty.
National Association of Realtors data shows 12% of real estate contracts were canceled between February and April 2020. Two of the most-cited reasons for the contract cancellations were:
- Job loss
- Financing issues
There are also situations where a seller doesn’t have legal recourse but may try to reason with the buyer before backing out of a real estate contract, said David Reiss, a law professor and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
Perhaps the seller was moving out of state but plans changed because their parents became sick or a job offer fell through.
“One of those kinds of things, where you kind of negotiate with (the buyer) or you kind of put the hex on the property by talking about all the bad things about the property, I think those are the nonlegal ways of doing it,” Reiss said.
4 reasons sellers can terminate a real estate contract
Here are some scenarios in which a home seller can back out of a purchase agreement:
- Not finding a suitable replacement home
- Using the attorney review clause
- Not having a clear title to transfer
- Taking advantage of the buyer’s contingencies
1. Not finding a suitable replacement home
If the seller includes a new home contingency in the contract that says they must find a home — within 30 to 60 days, for example — but can’t, they can walk away from the deal, Reiss said.
2. Using the attorney review clause
Depending on local laws, the contract may be subject to a review by a real estate attorney, Reiss explained. If there are any issues that come up, or the seller instead decides to keep the home, the seller can pull out of the contract penalty-free during the review period, which may last for three business days. This also applies to homebuyers.
3. Not having a clear title to transfer
Having a clear title on your home is crucial to a home sale. If a title search reveals outstanding liens — such as an overdue contractor or property tax bill — on the home that the seller hasn’t addressed, a home sale can’t happen until those liens are paid.
4. Taking advantage of the buyer’s contingencies
Let’s say the home inspection finds some needed repairs around the home. If the buyer has a home inspection contingency, they can request that the seller complete those repairs for the deal to move forward. If the seller declines to make the repairs, this gives both them and the buyer a reason to walk away.
Tips for backing out of a real estate contract the right way
Before you’re in the middle of selling your home and decide to renege on the sale, keep the following tips in mind to minimize your legal headaches:
- Don’t let emotions drive your decision to cancel. You may get cold feet at some point before your closing day. “It’s a known thing where people put their house on the market, they get a buyer and then they decide, ‘No, I just want to stay,’” Reiss said. This can cause problems for both the buyer and the real estate agent, who took the time to find that buyer and is expecting a commission, he added. Bottom line: Having a little anxiety shouldn’t automatically be a signal for backing out of a real estate contract, especially after the buyer is expecting to close the deal.
- Take your time before you sign. You could’ve verbally agreed to sell your home to a particular buyer, but you’re not legally obligated to do so until you sign a real estate contract. “Even if the other side has signed it, you’re not going to be bound,” Reiss said. Review the contract with your attorney before signing to confirm that the terms work for you, and feel free to back out if they don’t.
- Rely on the contingencies included. Remember that contingencies can give you and the buyer a way out of the sale. If there’s a home appraisal contingency, you might consider terminating a real estate contract if your appraisal comes in lower than expected and you’re unwilling to drop the home price, for example.
What to do if a seller backs out of the contract
As a homebuyer, the first action you should take after the termination of a real estate contract by a seller is to work with your real estate attorney to determine whether the seller breached the contract. The seller may be protected if they backed out based on a specific contract contingency. If the seller did violate the agreement, however, you may be able to take legal action.
Consequences for a real estate contract breach
There are a few financial and legal consequences home sellers may face for backing out of a real estate contract in ways that aren’t covered in the terms of the agreement. They may include:
- Compensating the buyer (money damages)
- Returning the buyer’s earnest money deposit, which may range from 1% to 3% of the home’s purchase price, and other related expenses
- Completing a court-ordered sale of the home
Suing the home seller may sound like a feasible option, Reiss said, especially because of the effort, money and time put into finding and attempting to buy a home.
“But in practice, to have to go to court and get a court order, and that might be appealed, and it might be appealed again, it might take a long time and it make take a lot of money,” Reiss continued, “it’s not obvious that buyers are going to want to go through the cost hassle and time to enforce their rights.”
It’s critically important to consult a real estate attorney that can comb through your home purchase contract — line by line — to clarify all of its terms. Each individual agreement has varying language. While you may not expect the home seller to have a change of heart, it can happen.