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Can a Seller Back Out of a Real Estate Contract?

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You may be ready to breathe a huge sigh of relief once you’ve found a home, had your offer accepted and signed on the dotted line. But is the house really yours — or can a seller back out of a contract?

The short answer is yes, a seller can cancel a contract — but only under particular circumstances. Even then, there will likely be consequences for the seller, as the laws around real estate contracts tend to favor the buyer rather than the seller.

Can a seller legally cancel a real estate contract?

The rules determining when a seller can cancel a signed contract will depend heavily on what’s in the contract. So, while there are situations where it’s legal for either a buyer or seller to back out of a real estate contract, that doesn’t mean it’s going to be easy or risk-free.

Most real estate contracts have contingencies, clauses that spell out the specific situations in which a buyer or seller is free to back out. For example, standard contingencies allow a buyer to back out of the deal if the home receives an unexpectedly high home appraisal, an inspection reveals major issues, the house proves uninsurable or the buyer can’t secure financing. If the seller’s situation aligns with a contingency, they are free to walk away. But if it doesn’t, trying to back out can be costly and futile.

The two main avenues a seller can use to cancel a contract legally are:

  1. For reasons spelled out in the contract. The seller can back out for reasons written into the contract, including (but not limited to) contingencies.
  2. The buyer is in breach of the contract. If the buyer is “failing to perform” — a legal term meaning that they’re not holding up their side of the contract — the seller can likely get out of the contract.

Fortunately, it isn’t typical for a seller to back out at the last second. Only about 7% of signed real estate contracts fell through between March and May 2022, according to data from the National Association of Realtors, a rate that has held steady over the last year.

Can a seller back out of a contract to accept a higher offer?

In most cases, the answer is no, as long as the contract has been signed. When a buyer puts in an offer on the house and the seller accepts it, both parties sign a home purchase agreement. This legally binding contract sets out the sale price, closing date and other terms of the sale. Between when the contract is signed and the closing date, the house is said to be “under contract,” and the seller is legally committed to the transaction. The only exception is if the contract has an attorney review clause, which will be explained below.

7 reasons sellers can back out of a real estate contract

Here is some more detail about the most common scenarios in which a home seller can back out of a purchase agreement:

  1. Not being able to find a new home. Many contracts allow a seller to cancel the sale if they cannot find a new home or move before the closing date.
  2. Using the attorney review clause. Some real estate contracts include — and some states require — an attorney review clause, which sets aside several days after the contract is signed for each party’s attorney to review the contract. If either side wishes to back out of the deal, they can do so within that period without penalty.
  3. Not having a clear title to transfer. If a title search shows that the seller has outstanding liens, disputes or claims against the home, they won’t be able to sell it.
  4. The buyer “fails to perform.”  The contract will set out a schedule of deadlines that must be met during the escrow period (the period between signing the contract and closing). If the buyer is missing closing deadlines or failing to make scheduled deposits, for example, they may be found in breach of contract and the seller could get out of the sale without penalty.
  5. The buyer’s contingencies allow it. Typically most of the contingencies written into a contract are there to protect a buyer’s interests, but in many cases they can still provide an “out” for the seller. For example, say a buyer has an inspection contingency that requires the seller to allow a home inspection. If the inspection reveals a major problem, the buyer might request that the seller foot the bill for repairs or lower the sale price. If the seller wants to get out of the contract, they can lean into the buyer’s contingency by declining to complete the repairs or lower the price.
  6. Undesirable details that scare the buyer. The law requires a seller to disclose specific information about a home during the sale process, but a seller desperate to get out of a contract might decide to divulge even more to a buyer in the hopes that these dirty details will scare them off. The only problem with this tactic is that in some cases, a seller must disclose to all future buyers anything they have disclosed to a buyer in the past.
  7. The buyer agrees to it. Sometimes a seller’s ticket out of an airtight agreement is simply asking the buyer to let them out of the contract. A buyer isn’t obligated to agree to such a thing, but it doesn’t hurt to ask.

Consequences for backing out of a contract as a seller

The buyer can sue if a seller tries to back out of a contract. There are several avenues the buyer can pursue, depending on their goals, including:

Trying to force the sale. If the buyer sues for “specific performance,” the court can order the sale to continue and transfer the title to the buyer against the seller’s wishes.

Trying to receive monetary compensation. If the buyer sues for damages, the court may force the seller to pay for any costs the buyer paid out due to the ordeal — these could include legal fees, inspection and appraisal fees and storage or temporary housing costs.

The seller could also be sued by their real estate agent or listing agent, since they are often compensated by commission; if the deal falls through, they will have lost that commission.

Even if no one sues, the seller will have to return the buyer’s earnest money — often with interest.

What to do if a seller backs out of the contract

As a buyer, if something is going wrong with your purchase your first step is to make sure you don’t panic. Instead, you’ll need to gather information and consider your options. Here are some steps you can take to get things back on track or exit the situation with the least amount of financial loss:

Make sure you have everything in writing The real estate contract is the backbone of your deal with the seller and must be written down. Courts will not enforce verbal agreements to buy or sell real estate.
Consult with a real estate attorney The laws around contracts and real estate are deep and confusing waters to navigate on your own. The best thing to do is find a real estate attorney who can look over your contract line-by-line and help you understand your rights in the situation.
Try to come to an agreement with the seller Although a dispute over a broken contract can quickly turn into a pitched battle that ends in court, it doesn’t have to. If you approach the seller and discuss the situation openly, you may be able to come to an agreement that saves everyone time and money.
Sue As mentioned above, you have the right to sue either for damages or to force the sale. However, enforcing a real estate contract in court is expensive and time-consuming, so you’ll need to carefully consider how hard you’re willing to fight.
File a lis pendens If you choose to file a lawsuit after meeting with your real estate attorney, you may find it helpful to record a lis pendens. This legal document notifies the public that you have filed a legal claim involving the home, making it less likely that anyone else would buy it. If they do so, they will have to accept the court’s decision when your suit is settled.

 

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