Updated: Dec 12, 2020
When purchasing a home, home buyers and sellers enter into a home purchase contract. This establishes the terms of the contract including price of the sale, any contingencies and dates the parties will meet at the closing table. Sometimes however one of these parties wants to terminate the contract. Below will review when it is acceptable to terminate the contract and what possible repercussions can occur.
Home Sellers Termination
Home Sellers can almost never terminate a home purchase contract, they have already made the decision to place their house on the market and accepted the purchase price of the home. When you review the notice to terminate contract, it highlights how many additional reasons a home buyer has to terminate, than a home seller does. Home sellers can force the hand of a home buyer since almost all home buyers find things during the inspection phase or appraisal phase. This can often occur when there is a backup offer on the table that is better than the current purchase contract. When the inspection objection arrives, the home seller can refuse to fix the issues or give concessions usually causing the home buyer to implement the termination of the contract. With any real estate transaction, there are a plethora of time frames. The home seller can also refuse to sign any addendums that extend contract dates. These could change the time period for contingencies or even modify the names of the home buyers on the contract. Refusing to do these things can cause the home buyers to be nonperforming and allow the seller to terminate the contract.
Can a home seller back out of a purchase agreement without cause?
Home sellers can get cold feet due to looking at new homes and finding out that their current home is actually better than the other new homes out on the market for a similar price. They also may learn that the home buyer is looking at making major changes or become afraid that they may not keep the property as nice as they have cared for it.
A home seller who attempts to back out of a home purchase agreement without cause is subject to legal liability from not only the home buyer but also their own sellers agent. The sellers agent will want to be compensated for their time and marketing materials. The home buyer could feasibly go to court and could force the sale of the home due to the signed contract. Since the seller failed the specific performance of the contract, the buyer could even place a lien on the home known as a Lis Pendens.
Home Sellers can back out of a purchase agreement when:
There is only a verbal agreement in place. This is because the sale of land requires a written contract due to the statute of frauds.
If the contract is unsigned than the contract isn't enforceable. Real estate contracts generally have a time that the parties must sign by until it expires.
If there is a new home contingency. This formally establishes in writing that the home seller has the time to find a new home that meets their needs or else they may legally back out of the contract.
If there is a scam that is present such as the purchase price is egregiously low. This doesn't mean a lowball offer, but more like a $40,000 purchase price for a $400,000 home.
If the buyer agrees to the termination of the contract
Often the outcome of a home seller backing out of a contract is that the home buyer and sellers agent negotiate a fair compensation for their time. This fee has a large range and depends on the circumstances however it wouldn't be uncommon to spend $20,000 in total to the affected parties. This is still an expensive thing to do and why it is important to know for sure that you want to sell your home before signing any contracts.
Can a home seller back out of a listing agreement?
When there is a home sale, the seller and listing agent will generally enter a listing agreement. Listing agreements establish the sellers brokerage has the exclusive right to sell the home for a set period of time. A home seller can back out of a listing agreement, however there are some caveats. The first thing the home seller should do is attempt to work with their current listing agent and identify where the agent isn't meeting expectations. Working with the agent they may be able to modify their performance.
The next step is to identify if you signed an exclusive right to sell agreement. If this is in place understand that contractually the listing agent technically cannot be fired if they have fulfilled their duties until the listing period has expired. There are several options to move forward:
Firstly, you can tell the listing agent that you wish to use a different agent. Many agents will understand as long as you have communicated their failures. They will often allow you to leave the contract.
Your right to sell agreement is actually with the brokerage, you can contact the brokerage directly and ask for a different agent on the team to be assigned to your listing.
The home seller also can ask for the home to be taken off the market and wait for the listing agreement to expire. These agreements generally last for 3 months however there is no set time period and varies with every agreement.
Finally, you can contact a real estate attorney and see what they recommend for canceling the specific contract. Each state has different protocols of how to formally process the listing contract cancellation.
Home Buyers Termination
Home buyers have a variety of contingencies within a purchase contract. These allow them to modify the terms of the contract as they are completing their due diligence including termination. Home Inspection contingencies allow for the home buyer to have a home inspection of the home and identify issues. Home inspections are the most common reason that a contract is terminated. When unsatisfactory conditions are found, home buyers issue a home inspection objection stating what should be corrected. At this point in time, there are four possible outcomes that can arise.
The most common outcome is that the home seller issues an inspection resolution. This is worked on by both the buyer and seller to recognize and fix some or all of the issues that were found during the inspection. Concessions can also be made to give the buyer money off of closing costs utilizing the contract to amend/extend contract.
The home buyer can sign the termination forms.
The home seller can not propose a inspection resolution. If the home buyer doesn't do anything, it will terminate the contract.
The home buyer can rescind the inspection objection and continue with the home purchase.
The home seller then lays out the home inspection resolution that goes over what will be fixed before closing. It is extremely important that the home buyer and buyers agent ensure that everything is written down. A good real estate agent will know how to write things very specifically so that there is no grey area. These are the terms will be brought forward to ensure that the home sellers are preforming on their contract. If there is an issue with the quality of the timing or workmanship this document will be referenced. This is why it is important to have built up some level of trust between the two parties to ensure these things will be carried out properly. Even if the home seller states everything perfectly, the home buyer can still terminate the contract if they wish and not accept the terms of the inspection resolution.
Terminating Without Cause
Home buyers can always terminate a contract until the final papers are signed and the contract has closed. If a home buyer terminates the contract without any cause, they will be in breach of contract and lose their earnest money deposit. Earnest money is generally around 1% of the home purchase price but can vary wildly. This can be a good amount of money since 1% of a $600,000 home is $6,000. If you are getting cold feet it is important to notify your agent immediately so they can help work within these contingencies to help save your earnest money. They could also negotiate extending deadlines so you have more time to think or attempt to negotiate part of your money back. If you have passed your contingency dates it may be worth consulting a real estate attorney for legal advice on how to establish a good course of action.
Can Home Buyer change mind after closing on the house?
Home buyers who have signed the closing documents and when the deed is signed and recorded can not change their mind. They are now the legal owners of the home. If there are serious defects of the home that the home seller did not disclose, than legal action can be taken and possibly reverse the sale. This however is rare and lengthy lawsuit process. If you have cold feel shortly after purchasing your home, talk with your Realtor® who will likely offer a discounted rate to help you sell the home.