Can You Back out of a Real Estate Contract? Everything Buyers Need to Know

·4 min read

You have shopped until you nearly dropped to find a home. But shortly after the seller agrees to your offer and you sign a contract, something causes you to want to do an about-face on the deal. Is it too late to throw in the towel?

As more recent buyers admit to regretting their home purchases, this is surely a question some are asking.

However, the answer depends on whether the offer is still in the due diligence period or if certain circumstances have arisen that might give you the right to back out of the deal without consequence. Here’s what you need to know.

Due diligence in real estate

The simplest time to terminate a real estate contract is during the due diligence phase, a negotiated period during which a buyer has the opportunity to review the house and make sure everything seems okay before deciding to move forward.

Rules and customs around this period vary by state and market, but the standard due diligence period lasts 10 days. In today’s competitive market, however, shorter evaluation periods are common.

“The inspection and due diligence period is largely like a get-out-of-jail-free card,” says real estate attorney Jason Wells of Wells Law Group in Tempe, Arizona.

What Does ‘Contingency’ Mean In Real Estate?

After the due diligence period has ended, the only chance of getting out of a sale contract without losing any money is if a contingency is not met. The standard real estate contract lists several conditions that must be met before the closing date. These conditions are called contingencies because they make the closing contingent upon certain requirements.

Contingencies are there to protect you if something is found during the home inspection, title process or if the appraisal goes too high. If a buyer needs to sell a current home, they may try to include a home sale contingency, but sellers often don’t agree to this.

Another common contingency is a financing clause. This clause indicates the buyer will use all good faith efforts to obtain a loan, but if they are not able to qualify for a mortgage, then they can get out of the deal without consequence. Within the financing clause, buyers will typically list the type of loan they intend to obtain, the down payment amount, term of the loan and interest rate.

(With many buyers getting pre-approved for a mortgage before home shopping, it is rare for financing issues to cause a deal to fall apart. However, fears about this are a big reason sellers prefer cash offers and may even accept a lower price from a buyer that doesn’t need a mortgage.)

In today’s robust real estate market, many buyers are waiving contingencies in order to win bidding wars. It is especially common to waive appraisal contingencies, with buyers agreeing to make up the difference if the home appraisal comes in below their offer price.

However, Coldwell Banker agent Carrie Firth suggests that in a fast-paced market especially, buyers should ask for contingencies.

“This helps to protect them from the unknown,” she says. “Although a buyer should be writing an offer with full intention of closing on the sale, sometimes there are factors they may not be aware of when putting pen to paper, or sometimes things change during the contingency period.”

Earnest money: What if I change my mind?

Maybe the house is in pristine condition, your loan comes through without a hitch and the appraisal is exactly what you offered — but you just aren’t feeling it. Maybe your plans changed because of a job change or family emergency.

Whatever the reason, you can usually still back out until closing, but it will cost you.

As part of the contract, buyers and sellers agree on how each side would be compensated if the other party backs out or can’t live up to the deal for some reason. This is known as earnest money and typically equals 1% to 3% of the agreed upon sale price, although the standard can be as high as 10% in some markets.

Buyers deposit the earnest money into an escrow account at contract signing to be applied to the down payment or closing costs if the deal goes through. If the buyer does not complete the deal, however, the seller gets to keep the earnest deposit as compensation for the time and money they’ll have to spend relisting their home and searching for another buyer.

“If something happens that makes me not want to buy this house now, I can still cancel the contract and not purchase the home,” says Wells. “I will lose my earnest money though.” In some cases, a seller may sue for other expenses or even try to force a sale, but this is rare.

More from Money:

Rushing to Buy a Home Can Lead to Serious Regret. Here’s How to Not Hate Your House

After a Year of High Prices and Cutthroat Competition, Homebuyers Are Burned Out

‘Make Me Move’: Sellers Are Listing Their Homes at Ridiculous Prices Just to See What Happens

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