Can a Seller Back Out of a Contract?
The U.S. housing market has been somewhat chaotic since the beginning of the coronavirus pandemic. In some locations, bidding wars have been breakout out, with people offering to purchase homes for far more than the asking price.
There is some evidence that the market is cooling off a bit, but it’s still strongly a seller’s market at this point.
If you’re a buyer, this can rightfully make you nervous. Can a seller back out of a contract they’ve signed to sell you their home? If you are a seller, other more attractive offers might make you wonder if you can walk away from an existing deal to take a more appealing one.
Let’s take a look at what you need to know.
Can a Seller Back Out of a Contract?
Can a home seller back out of a real estate contract? Whether you are a buyer that is worried about your purchase not going through, or a seller that is getting cold feet on a deal, the answer to this question is of the utmost importance during the period of time when a house is under contract.
It is actually not uncommon for home sellers to back out of a deal. This is particularly true in hot real estate markets. Sellers can even back out of deals when they don’t have a clear legal right to do so.
Most contracts for a home purchase include provisions that are designed to protect the buyer. If a seller wants to renege on buyers, they typically have an uphill battle to fight. That is, unless the buyer fails to fulfill their duties, such as missing a closing deadline or missing a deposit.
So, even though sellers do back out of deals, it can be a messy process that might not end well for them. There are certain circumstances where sellers can walk away without any negative consequences, but others where they could face some major issues.
For this reason, it’s important to only enter into a real estate contract if you are certain you want to sell a property. In general, the buyer has a number of built-in ways to back out of a deal, while the seller does not have nearly as many options.
(If you’re selling your house, you’re likely motivated to sell it as fast as possible. Check out this article to learn how to speed up the process.)
Why Would a Seller Want to Back Out of Selling Their Home?
There are a number of different reasons why a seller might want to back out of a purchase and sale agreement that they previously accepted. Let’s take a look at some of the most common reasons.
The Seller Can’t Find a New Home
Oftentimes, when a seller is getting rid of their house they are also looking for a new place to live. If they have put their current home on the market and are looking for a new home at the same time, they could find themselves in a position where their current home sells but they don’t find anywhere to move to.
This is much more likely to happen in a seller’s market. This is because it’s much more difficult to be a buyer during this type of market. Someone might have a relatively easy time selling their own home while they find themselves getting outbid in the process of trying to buy a new home.
In order to be able to walk away from a contract without ramifications, the seller’s agent would need to make the sale contingent on the seller purchasing a new home.
The Appraisal Came Back Higher Than the Buyer’s Offer
As a part of the home sale process, the bank has the buyers hire an appraiser. This is a professional who visits the home and uses market data to determine the real value of the home. If the appraisal comes back much higher than the buyer’s offer, the sellers might want to back out so they can try and get a higher price for the home.
Their Life Circumstances Changed
Sometimes, the unexpected happens in life. Perhaps the seller had a death in the family or lost their job. This might mean that they are no longer in a position to sell their house and move out. Sellers might also change their minds about selling a house if there is a disagreement within the family about the topic.
(Are you wondering if you can skip the stage of the home selling process where you shell out a ton of money to doll up the home? Take a look at this article about selling your home as-is.)
They Feel Emotionally Tied to the House
When you own a home and live in it, you inevitably become emotionally tied to it. The property becomes a place that is filled with memories. Perhaps the sellers raised their kids in the home or lived there with a spouse who is now deceased.
Someone might practically decide that selling their home is the right financial decision for them. However, emotions simply aren’t guided by what is practical. After having decided to sign the contract with a buyer, a seller might simply not have it in them to give up the home that is so important to them.
The Seller Gets a Higher Offer From Another Buyer
When you’re selling your home, it’s logical that you would want to make as much money as possible from the deal. So what happens when a seller signs a contract and then receives a higher offer?
In this circumstance, sellers might choose to try and back out of the deal. Whether or not this is possible has to do with specific circumstances.
The Consequences of Backing Out of a Home Sale
If a seller walks away from a purchase contract, they can be sued because they breached the contract. The seller can be ordered by a judge to sign over the deed and complete the sale of the home even though they tried to back out. While the buyer can sue for damages rather than the property, they typically sue for possession of the home.
This can be costly for buyers in a number of ways. They often have to pay the legal fees of the buyers on top of their own.
Sometimes, the seller will also be ordered to:
- Repay buyers for the money they spent on the appraisal and inspection
- Return the good faith deposit that was put down by the buyer, plus interest
- Repay the buyers for reasonable expenses they incurred
- Pay the buyer for lost equity that they could have realized from the home
- Pay the listing agent back for marketing costs and their lost commission
If a seller is hoping to break a contract without dealing with a fight in court, they might offer to give the buyer enough money that they are willing to exit the deal.
Breaching a contract is a matter for civil court. This means that there aren’t criminal penalties for walking away from a contract. That being said, the damages you are ordered to pay in civil court can be substantial.
(Are you wondering if you can sell your home online? If so, take a look at this guide.)
How Can a Home Seller Avoid Penalties?
Adding contingencies to the sales contract is how home sellers can give themselves the opportunity to walk away if they choose to. This means that the sale of the home is contingent on certain conditions.
For instance, a home seller might choose to make the sale of the home upon having a contract to purchase another home. Or they might add a deadline or time frame for all purchase offers.
In general, a seller can’t get away with reneging without cause. For this reason, sellers should think long and hard before accepting an offer on their home. If the buyer didn’t fail to perform or you don’t have contingencies that protect you, you’ll want to be fully committed to the sale.
That being said, sometimes buyers will fail to perform. One common way is not being able to obtain financing. The buyer’s lender might not appraise the home at a high enough value in order for the buyer to secure financing. If this is the case, a seller can walk away without any requirement to negotiate.
If a seller wants to back out of a sale after it has closed, they are simply out of luck. Once the closing has happened, there is no chance of exiting the deal. At this point, the money, title, and everything else has been transferred.
If the seller is hoping to still live in the home for a while after the closing, the buyer might be willing to lease the property to them for a period of time.
When Can a Home Seller Back Out of a Real Estate Contract Legally?
Can a seller back out of a contract before closing legally?
In general, real estate contracts are built to protect buyers and not sellers. That means that it isn’t as easy to back out as a seller as it is for buyers. Buyers can typically walk away if they find something they don’t like during the inspection, if the appraisal comes in low and the negotiations fall apart, or if their mortgage falls through.
There Was a Home Sale Contingency in the Contract
If a seller wrote a contingency of sale into the contract, they can legally walk away if the house they were trying to buy fell through. It’s important to understand that this contingency must be explicitly written into the contract in order for a seller to be able to back out without ramifications.
The Buyer Fails to Perform
If the buyer doesn’t meet the various deadlines that are written in the contract, the seller can walk away. This might mean they don’t perform the inspection within the allotted amount of time or they don’t secure a mortgage in the time written into the contract.
Hustlers or Scams Were Involved
If a seller has been swindled in some way, in extreme cases, a seller might be able to walk away from a sale. As a seller, chances are your circumstance doesn’t qualify as letting you walk away without consequences in this way. However, it does happen.
Do You Want Your Home Sale Process to Be Simple, Fast, and Easy?
Few things in life are as stressful as selling your home. The process drags on, and the buyers have several opportunities to walk away, leaving you at ground zero.
It seems like the buyers are able to back out of a contract much more easily than the seller. Can a seller back out of a contract? The answer is yes, but depending on the circumstances there could be serious legal and financial repercussions and they still might be ordered to transfer the property to the buyers.
If you want your home sale to go smoothly, you might consider selling your home to an iBuyer. These are cash buyers that buy your home as-is, saving you from all of the pre-listing nightmares typically associated with selling a house. You don’t have to deal with showings or open houses, and the whole deal can be over and done much faster.
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