When can a seller back out of a real estate contract?

Selling a house can be full of uncertainty: Even after the purchase agreement is signed, the sale is not 100% guaranteed, and yes, there are situations in which a seller may be able to walk away. Let's look at some instances when a seller may be able to back out of a real estate contract and the consequences this decision may trigger.

Why a seller might back out of a real estate contract

Life may get in the way, and in some situations, a seller might discover that they want to back out after signing the purchase agreement. While every situation is different, some common reasons for this include:

• Another buyer made a higher offer.
• Unexpected life events occurred, such as divorce or the loss of a job.
• The property was appraised for more than the buyer offered.
• The seller was not able to find a new home in time.
• The emotional attachment caused hesitation and a change of heart.

When can a seller back out of a home sale?

Even if the house has been put on the market and received some offers, it may be easy for a seller to back out of the sale. What's more, in some circumstances, there could be ways to break a contract without legal consequences even further along in the selling process. For example:

• The contract has yet to be signed: After a buyer submits an offer on the house and a seller accepts it, the parties are likely to sign a purchase agreement, a step that may place the buyer and seller "under contract." However, before any legal documents are signed, a seller could back out without the consequences.
• During the attorney review: An attorney review is typically a period of a few days after signing the contract, during which attorneys of both parties may examine the contract and propose its modifications. In the states with the attorney review period, the agreement may not be legally binding until the terms of the sale are finalized.
• Unmet contingency: A home purchase agreement may have a contingency clause specifying some requirements to be met before the contract for selling a house becomes binding. Such conditions may include mortgage, home inspection or homeowners insurance contingencies. For example, if a buyer cannot secure financing, a seller could possibly cancel the contract with no consequences.
• Finding a new home contingency: Some sellers may be able to protect themselves when crafting a purchase agreement by including a condition that a sale may take place only if they secure a new home in a given time (for example, 30 days). If they are not able to find a new residency, it may be possible to back out of a contract before closing.
• The buyer breaches a contract: If a buyer does not fulfill their obligations — for example, by failing to close escrow by the set date — it could offer a seller a way out without penalties.
• Mutual agreement with a buyer: In some cases, an understanding buyer might agree to terminate a real estate contract without the consequences and penalties. While this approach may not necessarily be successful, it could be worth trying to explain your situation and reasoning.

Backing out of the contract may be a complicated issue that must be approached carefully to avoid disputes and penalties. In many cases, it may be helpful to consult an attorney before taking any definite steps.

Consequences of backing out of a real estate contract

If a seller backs out of the contract before closing, they may face significant consequences, such as:

• Paying for damages and monetary compensation: Being liable for buyer compensation is common if a seller breaches the contract. For example, damages may include the earnest money deposit, application fees, legal costs, appraisal and inspection fees, and other expenses ordered by the court.
• Having to complete the deal anyway: It is not unusual for buyers to attempt to force the sale through court when suing for damages. Depending on the circumstances, the court may allow it, and the seller could be compelled to transfer ownership to the buyer. If you find yourself in this situation, it may be helpful to seek professional legal advice.
• Compensating the real estate agent: Like a buyer, a real estate agent may pursue compensation for breach of contract. If a seller backs out of a contract, they may be able to sue for lost commission and other related expenses. When navigating a scenario like this, you’ll likely need to enlist a legal professional for advice.
• Losing trust and market reputation: The seller's reputation on the market is one of the intangible risks that come with walking away from the contract. However, it's still important to consider since some buyers and agents may hesitate to work with a seller who has a history of such behavior.

In summary

Backing out of the real estate contract can be done under certain circumstances. But it’s probably not a decision to be taken lightly by any of the parties. Doing so can come with many risks and consequences, from financial penalties to lost reputation. If unavoidable, parties who consider walking away from the purchase agreement may want to weigh their options carefully and seek professional advice if needed.