Disclosure: This article is not a substitute for legal advice. Please consult with a licensed attorney.
It’s not uncommon for people to change their mind about selling or buying a home.
Buyers must contend with the idea of spending hundreds of thousands of dollars on a long-term commitment, and may find problems with the home itself or in getting financing. Sellers may have a difficult time letting go of a lifetime of memories built up in their home, or in finding a new home to move to.
Either way, the closer a deal is to completion, the more difficult — and more expensive — it usually is to cancel.
If you’re asking when you can back out of buying a house or selling one, here’s what you need to know:
- When Can a Buyer Back Out of Buying a House?
- Reasons Why You Might Back Out of Buying a House
- When Can a Seller Back Out of the Purchase Agreement?
- How To Get Out of a Real Estate Contract Before Closing
- Costs From Backing Out of Buying a House
- The Bottom Line on Backing Out of Buying a House
When Can a Buyer Back Out of Buying a House?
To answer this question, it’s important to understand that buying a home is a contract between the buyer and the seller. This contract is called the purchase and sale agreement, and it sets out the agreed-upon terms of the sale.
Until both the buyer and seller sign the purchase and sale agreement, either side can back out with little to no consequences, either by withdrawing or rejecting the offer that was made to buy the home.
Once both parties sign a purchase and sale agreement, it can be canceled without penalties only if a contingency in the deal isn’t met.
Contingencies are terms spelled out in the contract that must be met for the deal to go through. For example, a home inspection contingency involves a professional inspector examining the condition of the property. If there are issues with the home that make it unsafe, the buyer has the right to back out of buying the house with no consequences.
If you back out for a reason other than a contingency not being met, you’re essentially breaking the contract. At the very least, you would forfeit any earnest money you put down with your offer. At worst, both parties could be headed to court to resolve the issue if you and the seller can’t come to an amicable solution.
“There are many reasons, and opportunities, for a buyer to back out of a home purchase,” says Nathaniel Hovsepian, owner of The Expert Home Buyers, a real estate investment company in North Augusta, South Carolina. “The consequences come when they try to back out after their due diligence period has ended. This can result in a forfeiture of their earnest money deposit, which would go to the seller.”
Can you back out of buying a house after making an offer?
Yes, it’s possible to back out of a house after making an offer. If you make an offer and are having second thoughts, contact your real estate agent as soon as possible and let them know you want to withdraw your offer. The sooner you do this, the better.
If you receive a counteroffer from the seller, the ball is in your court. The seller is essentially declining the original offer and proposing a new one, so until you accept the counteroffer, you are free to walk away from the deal with no consequences.
Can you back out of buying a house after signing a contract?
Yes, though whether it will cost you depends on the terms of the contract you sign.
If you cancel the deal because one of the contingencies in the sales agreement hasn’t been met, you usually can walk away without having to pay penalties.
If all contingencies are met, canceling the deal usually will forfeit your earnest money deposit. And if you can’t reach an amicable deal with the buyer, you could be sued for breach of contract.
Reasons Why You Might Back Out of Buying a House
There are many reasons why you might want to back out of a real estate transaction, from a change in the housing market or your financial situation to simply getting cold feet. Here are some of the most common reasons.
Home inspection reveals need for repairs
If the home inspection uncovers major issues with the property and forecasts pricey repairs, you might want to rethink the purchase. You can back out of buying the house if your purchase and sale agreement contains a home inspection contingency.
Home appraisal comes in too low
If the appraised value of the home is lower than expected, then you might be paying too much for the house — and your mortgage lender may refuse to approve a loan large enough for you to close the deal. If there’s an appraisal contingency in the purchase and sale agreement, and both parties fail to renegotiate the contract to reflect a low appraisal, the buyer may cancel the transaction.
Buyer is unable to sell their current home
This might not be your first time purchasing a home, and you may need to sell your current home to be able to afford the one you’re making an offer on. A home sale contingency in the purchase and sale agreement stipulates that the deal to buy the home is contingent on the buyer’s ability to sell their current home. If you can’t sell your home, such a contingency would let you back out of the deal.
Buyer is unable to secure financing
Many real estate offers are contingent on the buyer getting a mortgage, so that if you’re unable to secure financing, the purchase and sale agreement would be void.
Problems with the property’s title
During the closing process, the title will be examined to determine who truly owns the property, as well as any liens on it. If problems with the title turn up, the seller may be unable to cleanly transfer it to the buyer in a timely fashion. A title contingency is common, and allows the buyer to cancel the deal if problems with the title are found.
Change in buyer’s financial situation
If the buyer loses their job, or has some other major change in their finances during the process of buying a home, they may need to reconsider whether they can afford the home and find a way to cancel the deal.
When Can a Seller Back Out of the Purchase Agreement?
Sellers also face consequences for backing out of a purchase and sale agreement. If a seller backs out after signing — say, there’s a case of seller’s remorse — the buyer could sue for breach of contract. The seller also may be forced to return the buyer’s earnest money.
Sellers typically can cancel a sale any time before they sign a purchase and sale agreement, if any contingencies in a signed agreement aren’t met, or if the buyer fails to meet the terms of the agreement, such as being unable to close the deal by the agreed-upon date.
Sellers can add contingencies to the contract that benefit them as well. For example, the sale can be contingent on the seller’s ability to buy a new home. If they can’t find a new home, they could cancel the sale and stay in their current home.
Can a seller back out of the contract after the home inspection?
While the results of the home inspection can have a major impact on the sale, the inspection itself doesn’t let the seller cancel the deal.
More typically, if the home inspection reveals the need for major repairs, the buyer may ask the seller to make or pay for repairs, or adjust the price to compensate. If the seller wishes to cancel the sale, they either can refuse in the hope that the buyer will cancel the sale, or negotiate an amicable cancellation of the sale with the buyer.
How To Get Out of a Real Estate Contract Before Closing
The best way to get out of a signed contract is through unmet contingencies.
As a buyer, you want to negotiate as many contingencies in the contract as possible, so you have the greatest number of available options to cancel the deal and keep your earnest money if something goes wrong. Sellers usually prefer fewer contingencies in the contract. Asking for too many contingencies in the agreement could be a deal breaker for the seller, so it’s important to think about what you can and can’t live without and negotiate accordingly.
Both parties should work with a real estate lawyer to draft a purchase and sale agreement that each side can agree to.
When is it too late to back out of buying a house? If all conditions are met, getting out of a deal before closing is more difficult. Given the risk of a breach of contract lawsuit, it’s best to consult a lawyer for legal advice in such a situation.
It’s possible you can negotiate an amicable way out of the deal with the seller, though you’ll likely forfeit your earnest money or have to otherwise compensate them for their time and effort. If that doesn’t work, the seller may sue you for breach of contract, and the issue will have to be decided in mediation or at trial — both very expensive options.
Costs From Backing Out of Buying a House
If you back out of buying a house after signing a purchase and sale agreement, you may lose any earnest money tied to the offer. The average earnest money deposit can be as much as 3% of the home’s value. In expensive markets, this could mean tens of thousands of dollars.
If the parties are unable to negotiate an amicable agreement, a lawsuit is possible. Lawsuits are notoriously expensive and time-consuming, and the cost of resolving the issue in mediation or at trial could run thousands of dollars.
The Bottom Line on Backing Out of Buying a House
Buying a house is a big decision, and sometimes people have second thoughts on that decision. Whether you’re a buyer or a seller, you should know that it’s possible to back out of a real estate transaction. If you find yourself in this situation, keep your options open with contingencies, be confident before you sign, and know that the sooner you back out, the better.