What happens when a buyer or a seller wants to get out of a real estate contract? Not every contract that’s ratified actually goes to closing. This is a situation that comes up more often than people expect, and it's important to understand how it works depending on which side of the transaction you're on. Here's everything you need to know before backing out of a real estate deal:
Contingencies for buyers. If you’ve already signed a contract but decide not to go through with the purchase, the first thing to check is whether there are contingencies. Most contracts include a deposit, which is a sign of good faith that you intend to close. That deposit is typically applied to your down payment or closing costs.
"Inspection, financing, and appraisal contingencies can offer a way out."
During the COVID market, many contracts were written without contingencies. In those cases, walking away meant losing your deposit. Now that the market has stabilized, contingencies are more common again. These include home inspection, financing, and appraisal contingencies. Each one allows a buyer to cancel the contract under specific conditions and within a certain timeframe.
For example, we recently had a case where an inspection uncovered serious issues that were not visible at first. The buyer decided not to move forward. The buyer was able to notify the seller, void the contract, and request a return of the deposit because there was a home inspection contingency in place. In this case, the deposit was about 1.5 percent of the purchase price.
These contingencies also apply when a property does not appraise or when financing falls through. In one case, a buyer lost their job during the process. They were able to cancel and recover the deposit because the contract included a financing contingency/
Buyers today have several options to cancel a contract, and contingencies are the most common tool. While you should never enter into a contract planning to cancel it, these protections are important if something unexpected happens. In many cases, buyers can walk away with minimal loss beyond the cost of inspection or application fees.
What should sellers do to exit? The situation looks different for sellers. I’ve seen cases where sellers have second thoughts after ratifying a contract. This can happen due to personal reasons or sudden regret. However, once a seller signs, backing out is not easy.
In many states, including Virginia, it’s tough for a seller to cancel a ratified contract without facing legal consequences. If a seller breaches the contract and the buyer still wants to go through with the purchase, the seller could be sued for damages or forced to complete the sale. In some cases, there may be ways to exit the contract, but they typically require legal assistance, which can be costly.
Sellers who find themselves in this position need to be very cautious and should always consult a real estate attorney. The legal and financial risks of backing out are significant, and it's essential to understand the consequences.
Real estate deals don’t always go as planned. When problems come up, it’s our job to handle them and find solutions. If you’re in a situation like this and want to discuss your options, you can contact me at (703) 286-9771 or send me an email at [email protected]. I’m here to help.
