Disclosure: This article is not a substitute for legal advice. Please consult with a licensed attorney.
People can get cold feet when buying or selling a home. Buyers must contend with the idea of spending hundreds of thousands of dollars on a long-term commitment, while sellers may have built a lifetime of memories in their home that they find difficult to let go.
Pulling out of a deal isn’t impossible, but it can come with serious legal and financial consequences if you wait too long. 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?
- 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
- Reasons Why You Might Back 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?
As the buyer, you can cancel a real estate transaction at almost any time prior to signing the closing documents. However, there could be penalties depending on when and why you’re backing out of a home purchase.
One of the key parts of the homebuying process is signing the purchase and sale agreement, which is a contract between the seller and the buyer that lists the price, terms, and conditions under which the house will be sold. Once the purchase and sale agreement is signed, the home is considered under contract — the seller takes down the listing, and the buyer puts down a deposit and has the house appraised and inspected. After this point, backing away from the deal comes with risks.
In general, the further into the process you are, the more punishing it will be to back out of a deal. If you’re facing buyer’s remorse, it makes sense to talk to a real estate lawyer and figure out what could happen if you change your mind about purchasing the home.
Note that the purchase and sale agreement shouldn’t be confused with the purchase agreement, which is the final contract that seals the deal on the sale.
When Can a Buyer Back Out of a Real Estate Transaction?
|Situations When a Buyer Can Safely Back Out of a Home Purchase||Situations When a Buyer May Face Consequences for Backing Out|
|The buyer has not submitted an offer yet.||The seller has accepted the offer and earnest money, and the purchase and sale agreement has been signed.|
|The buyer has submitted an offer, but it hasn’t been accepted yet.||When the buyer and the seller have signed the purchase agreement or closing documents.|
|A contingency clause in the buyer’s offer has not been met.||When all contingencies have been met.|
Can you back out of buying a house after signing a contract?
A buyer can cancel a real estate transaction before closing, even if they’ve signed a purchase and sale agreement. However, there could be monetary or legal consequences.
Most real estate transactions involve earnest money, which is a deposit that the buyer gives to the seller to prove their intent to purchase the home. Often, the deposit is made when the purchase and sale agreement is signed by the two parties. In a successful sale, that money will go toward a down payment on the house. Depending on when and why you back out of buying the home, you may lose some or all of that earnest money.
If you cancel the deal due to a contingency outlined in your offer or the purchase and sale agreement, you may be able to get the money back. A contingency is a condition that must be satisfied before the transaction happens. For example, an offer may be contingent on the home inspection showing no more than $5,000 worth of repairs needed. If repairs will be more expensive, you have the option to back out of the purchase.
Some common ways that contingencies aren’t met include:
- The home inspection shows severe defects with the property.
- The appraisal is too low.
- The buyer fails to secure financing for the home.
Again, it’s important to consult a real estate lawyer if you’re asking, “Can I back out of buying a house?” They can advise you on your options and the consequences of canceling the deal.
When is the best time to back out of buying a house?
If you’ve made the decision to cancel a purchase, the sooner you can back away from the deal, the better. A buyer can back out with no consequences any time before the purchase and sale agreement is signed by both parties.
“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.”
When Can a Seller Back Out of the Purchase Agreement?
Like buyers, sellers can face consequences for canceling a sale, depending on when and why they choose to do so. These are some of the situations when a seller can back out:
- Before they accept an offer.
- Before they sign a purchase and sale agreement.
- If any contingencies aren’t met.
- If the buyer fails to meet the terms of the agreement.
It’s important for a seller to add contingencies to the contract if necessary. For example, the sale can be contingent on your success in finding a new home to buy and live in. This may help shield you from the consequences of backing out of the deal.
Unless you have a good reason for backing out, it’s difficult to get out of selling your home after signing the purchase agreement. If you try to back out at that point, the buyer could take you to court over your contractual obligation to sell your home. Make sure to work with a real estate lawyer so that you understand the ramifications of backing out of a sale.
Can a seller back out after accepting an offer?
In general, a seller can back out after accepting an offer if they haven’t officially signed a purchase and sale agreement with the buyer. If the seller has signed a contract, backing out will likely be difficult — unless a contingency in the contract comes up.
Can a seller back out of the contract after the home inspection?
If the purchase and sale agreement contains an inspection contingency, and the home inspection reveals something that fails to meet it, then the sale can be cancelled by the buyer. The deal could also fall through if the seller refuses to make any repairs that the buyer might request as a result of the home inspection. The buyer may decline to close the sale unless any necessary repairs are resolved, which would free the seller from fulfilling the deal.
How To Get Out of a Real Estate Contract Before Closing
Prior to signing a purchase and sale agreement, it’s relatively easy to back out of a real estate transaction. There will be few, if any, consequences. However, once the agreement is fully executed, backing out gets more difficult.
A real estate contract can be voided through contingencies. When drafting the purchase and sale agreement, buyers and sellers may add any contingencies they want, as long as they agree on them. Good contingency planning can help prevent buyer’s — and seller’s — remorse.
When it’s time to close, the purchase agreement is the document that binds the buyer and the seller to complete their contractual obligations. Failure to follow through can mean forfeiting earnest money or facing potential lawsuits to demand fulfillment of the contract.
Both parties should work with a real estate lawyer to draft the purchase and sale agreement, as well as the purchase agreement. A lawyer should also be consulted if either party is considering backing out of the deal after any agreements are signed.
Costs From Backing Out of Buying a House
The costs from backing out of a purchase will depend on how far you are in the homebuying process, as well as the specific terms of any agreements you’ve signed. In general, the financial consequences get worse the further you are in the process.
If you decide to back out of the purchase before your offer is accepted by the seller, then you can simply withdraw your offer. You won’t face a financial loss at this stage.
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 amount can be as much as 3% of the home’s value. In expensive markets, this could mean tens of thousands of dollars.
Reasons Why You Might Back Out of Buying a House
There are many scenarios where you might want to back out of a real estate transaction, from a change in the housing market or your financial situation to simple cold feet. Other common reasons are included below.
Home inspection results
If the home inspection reveals 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.
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 your loan. If there’s an appraisal contingency in the purchase and sale agreement, and both parties can’t reach a compromise on negotiating the home price, you may be able to get out of the transaction.
Home sale contingency
This might not be your first time purchasing a home. If there’s a contingency in the purchase and sale agreement that requires finding a buyer for your current home, you can back out of the deal if you aren’t able to sell it.
Inability to secure financing
Many real estate offers are contingent on the buyer getting a mortgage. If you’re unable to secure financing, the purchase and sale agreement would be void. In this scenario, it’s important to include a financing contingency to ensure you won’t lose your earnest money.
Learn More: How To Buy a House With No Credit
The Bottom Line on Backing Out of Buying a House
While it’s not uncommon to get cold feet, backing out of a real estate contract can be difficult and involve hefty consequences. The further you get into the process, the worse the consequences will be. Be sure to consult a real estate lawyer prior to making any major decisions, and consider all the legal and financial ramifications before deciding to pull the plug on a deal.