Legally binding real estate contracts require that all the terms are fulfilled. Most real estate purchase contracts are created by a state-sponsored Realtor association. The guidance by nearly all Realtor boards is to provide contract language that allows for buyers to terminate during due diligence or during an inspection period without any financial penalty, unless the contract stipulates it with an amended term that the buyer agreed to up-front.
So, what about about the seller?
There are certain conditions under which a seller can back out of a contract without a financial penalty. However, in general, residential purchase contracts can't simply be broken by the seller on a whim or because the seller had a change of heart.
When Can a Seller Back Out of a Contract?
There are many reasons sellers may choose to back out of a contract after signing the contract and entering a purchase agreement. Here are some of those reasons.
Missed Closed Date
Many states allow buyers the right to unilaterally extend closing for a specified period of time due to certain situations like title company delays or lender delays. However, if for example a cash buyer with no lender or title company delays is unable to close on or before the agreed upon contract date, the seller may terminate without penalty if no extension or amendment is in place by closing day.
Re-Negotiation of Terms
After a bad inspection or a missed appraisal, the seller may be able to counter with terms that encourage the buyer to back out. If the appraisal comes back at a lower value than the purchase price and the buyer asks for lower/re-negotiated price on the home, the seller can reject the amendment. In essence, the seller can use an inspection or a missed appraisal as an opportunity for termination by way of an amendment. To be fair, this is still a termination that is initiated by the buyer, not the seller.
Home Sale Contingency & Kick-out Clause
Presentation of 2nd offer
There may be a second buyer who wants to purchase your home. However, in general a new offer does not in and of itself allow the seller to terminate with the 1st/original buyer - even if it is higher.
That said, if the buyer includes a "home sale" contingency, in some situations the seller may be able to accept a 2nd offer. Many contingency exhibits include a "Kickout Clause", which gives the seller the right to ask the buyer to remove (or kickout) their contingency terms. If the buyer is unable to clear the contingencies then the seller can accept the 2nd offer. In the "home sale" scenario, the buyer must be able to close on the purchase of the new home without first selling their existing home. If they can not do this due to financial or lender limitations, then the seller can proceed with a 2nd buyer, in effect terminating the original contract.
Inability of Buyer to "Perform"
There are several scenario where a buyer may not uphold all of the terms of the contract, which may open the door for the buyer to be able to terminate without penalty and even be able to keep the buyer's earnest money. Typically these scenarios involve buyer financing issues or egregious faults or shortcomings of the buyer.
Tips for the Seller to Back Out of a Contract
If you want to back out of a contract as a seller without encountering resistance from the buyer, you need to do approach the situation very delicately. Here are some tips that can help make things much easier for you:
- Offer a Refund: If you cancel the contract, offer a refund on top of the earnest money deposit. The buyer will get the earnest money regardless, but this refund will be in addition to the earnest money. We recommend .05% of the purchase price of the home. For example, if the purchase price is $400,000 you might offer $2,000 extra to the buyer.
- Keep your Reasons Quiet: The less said about your reasons for backing out, the better. If things get excessively messy, you could face litigation, and this is just not worth it in most cases.
- Be Reasonable: You don't want to be difficult or unreasonable when backtracking on your contract. The other party may have expended time, money, and effort in getting the home ready for sale according to a specific timeline you agreed upon. Try not to inconvenience them too much, or they might sue you.
- Be Clear: Make sure you have a good reason as to why you're backing out of the contract before you do it. And have a third party ready to speak on your behalf if necessary.
What Could Happens If You Cancel a Contract without a Valid Reason?
If you're wondering what happens if you cancel after signing a real estate contract, be prepared for some bad news. A seller must have legal justification to cancel the sale. There are many reasons why you might have to cancel, but if none of those apply, you could be sued for damages. Here are the consequences sellers are likely to face for canceling a contract.
If the buyer suffers damages because you backed out of the contract, they can sue you in civil court. They might be able to receive money for any losses incurred due to your decision, like the difference between the purchase price and the new home's value or legal fees involved in filing a suit against you.
The real estate agent can also sue you if you back out of the contract. The agent is entitled to a commission when their client's contract closes, so they want to make sure you live up to your end of the deal.
Reasons A Seller May Want to Back Out of Real Estate Contracts
As we've covered, most sellers that back out of a contract do so because of extreme situations - not simply because the changed their mind. That being said, here are a few common reasons that a home seller may be considering backing out:
- Lack of housing options: In 2021 and 2022 many home sellers found themselves in a predicament. They needed to sell their home in order to liquidate their equity, but couldn't find a reasonable substitute for the property they were selling. Since Summer of 2022, we have seen inventory begin to improve and prices moderate. Hopefully this will not be as major of a hurdle, despite higher interest rates.
- Emotional connection to a property: If you've spend half your life in a house, it can be hard to difficult to move on and enter into a new season of life.
- Unexpected life events: Job loss, pregnancy, family death or health problems could all play a very serious factor in deciding whether it makes sense to proceed with a purchase contract.
If you do not have any good reasons for breaking the contract, then you shouldn't break it at all. You will lose many things when you cancel the agreement, and your money is one of them if there is an earnest money deposit involved.
To avoid getting into problems during your home sale that may force you to cancel your contract, you need to sell with professionals. Our team at SimpleShowing offers professional home selling services in Florida, Texas and Georgia. Get in touch with us and let our experts help you in the home selling process.