Legally binding real estate contracts require that all the terms are fulfilled. They can't simply be broken by one party. However, there may be certain conditions under which a seller can back out of a contract without a financial penalty.
Sellers can back out of real estate purchase agreements when the appraisal is lower than the purchase price due to market fluctuations or an inaccurate estimate by the appraiser. In other circumstances, a seller may develop cold feet or change their mind about selling the property for personal reasons.
If you're in the middle of selling a rental property or a home and are wondering whether backing out is a good idea, continue to read this article. We've laid out everything you need to know about canceling a home sale contract without penalty.
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 selling paperwork and entering a purchase agreement. Here are some of those reasons.
Appraisal issues are one of the most common reasons why a seller might cancel the sale contract. If the appraisal comes back at a lower value than the purchase price, the buyer and seller can negotiate or go through with closing anyway.
There's a Higher Offer
There may be a second buyer who wants to purchase your home. The contract allows the seller to cancel the deal if they receive a better offer. The new interested party must have solid financing and proof of employment.
Sellers sometimes regret entering into a real estate purchase agreement on their home for many personal reasons. This might include a death of a family member, increased responsibilities at work, change of moving plans, or any other life event that may alter plans to sell at that time.
What Happens If You Cancel?
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.
Loss of Down Payment
If you put down a substantial amount of money on the purchase as part of an earnest money deposit (usually 1% of the property value), you will lose it. The buyer cannot use that money as part of their down payment for another home.
Loss of Earnest Money Deposit
An earnest money deposit is an amount of money accepted from a buyer to bind the agreement to purchase the home. This money is usually 1% of the property value, though it can be more or less depending on the market. This money is held in escrow until the sale closes, then it's typically applied to closing costs. When you cancel a property purchase agreement, you lose that deposit.
Loss of Property Appraisal
When you cancel the real estate contract, the home has lost its value to potential buyers. The appraisal is usually the home's total purchase price, but it will be significantly less if you cancel the contract. Lenders and appraisers can't value a house at more than what a buyer is willing to pay for it on the market.
When can a Seller Back Out of a Contract Legally?
It's not easy for a home seller to back out of a contract legally. Below are some circumstances when the seller will have the right to back out of a legally binding real estate contract.
Buyer Doesn't Uphold their Part of the Bargain.
The seller has the right to cancel the contract if the buyer does not uphold their end of it. It may include purchasing property insurance and paying property taxes, and completing any necessary repairs and maintenance on the home.
Buyer Breaches Contract
If a home buyer backs out after making an offer but before entering into a legally binding contract, this is known as a breach of contract. Sellers have the right to cancel in this situation because they didn't sign anything.
Duress or Undue Influence
The buyer has exerted undue influence or duress when they try to force someone into agreeing by threatening them with violence, physical harm, damage to the property, or even economic harm. The seller has the right to cancel if this is their situation.
False Representation or Misrepresentation
If a home buyer misrepresents themselves, for example, by lying on their application, the seller can cancel the contract while still holding them legally responsible. It would be considered a breach of contract because they misrepresented themselves, and the seller has the right to cancel.
Seller Wrote Contingency into the Contract
The seller can back out of a contract if they include contingencies in their selling agreement. This will usually something like, "This offer is contingent upon the successful sale of my current home." If this isn't completed, the seller can cancel and keep the escrowed funds. In this case, the seller wants to sell the home before buying another.
Tips to Back Out of a Contract Easily
If you want to back out of a contract without experiencing problems with the other party, you need to do it the wise way. Here are some tips that can help make things much easier for you;
- Offer a Refund: If you cancel the contract, offer a refund of the earnest money deposit.
- Keep it 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.
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 to anyone willing to sell their property. Get in touch with us and let our experts help you in the home selling process.