Can Sellers Back out?

How sellers can get our of an accepted offer on a house?

In general, home sellers have three ways to get out of a signed real estate contract:

• Taking advantage of a legal provision in the contract
• Proving the buyer committed fraud
• Persuading the buyer to agree to cancel the contract

Purchase agreements 101

Once signed, a purchase agreement is a legally binding contract. Parties are only released when:

• The sale is complete.
• One party uses an exit clause to terminate the contract.
• Both parties agree to modify or cancel the contract.

Important note: A purchase agreement only becomes legally binding when it’s signed by both the buyer and seller. A verbal or handshake agreement is not usually enforceable in a real estate transaction.

In other words, the seller can’t simply tell the buyer they’ve changed their mind and walk away.

Sellers should only attempt to cancel a purchase agreement if:

• It’s absolutely necessary.
• They have a sound legal avenue to escape the sale.

Using the wrong tactics to get out of a sale — or cutting corners when attempting to use valid ones — could quickly land sellers in a legal minefield.

Buyer breaches the Contract.

Though uncommon, the seller may be able to back out of the sale if the buyer violates specific terms of the agreement. This is called making a “breach of contract.”

Examples of buyer violations that may authorize the seller to terminate the contract include:

• Missing the deadline to make their escrow deposit
• Not informing the lender and/or seller of changes to their financial situation that could prevent them from securing their loan

State law and the contract itself dictate when and how a seller can terminate a purchase agreement based on a buyer’s breach of contract.

Typically, the seller must give formal notice to the buyer that they’re in breach and then wait several days to see if they comply.

California, for example, requires sellers looking to use a contract violation as a way to back out of escrow to:

• Deliver a “Notice to Buyer to Perform”
• Give buyer 2 days to comply with the contract

Long story short, sellers can’t back out if the buyer misses a deadline by a few minutes. They must be able to prove the buyer is willfully violating the contract, which requires time to go through the proper legal channels.

Buyer Defrauds Seller.

In extremely rare cases, a court may void a real estate contract if the seller can prove the buyer defrauded them.

Just like it’s illegal for sellers to lie about the condition of a house, buyers may not use fraudulent practices to trick someone into signing a purchase agreement.

For example:

Hustlers masquerading as real estate investors have been known to prey on elderly homeowners and trick them into selling their houses for a fraction of their fair market value.

If you think you or a loved one may be a victim of fraud, consult with a real estate attorney before attempting to terminate a contract.

Valid reasons Sellers can terminate real estate contracts.

Assuming the buyer holds up their end of the bargain, it’s very difficult for sellers to back out of a purchase agreement.

That said, there are three possible scenarios that allow a seller to terminate a contract, even when the buyer wants to follow through with the sale:

• The contract includes language that authorizes the seller to cancel it under certain conditions.
• The buyer violates specific terms of the contract.
• The seller can prove the buyer committed fraud.

Seller backs out of contract using a contingency.

The most straightforward way for sellers to back out of a signed contract is to exercise a “contingency” — a clause in the agreement that allows one or both parties to walk away under certain conditions.

The hitch is that sellers often don’t have this option. Most contingencies in purchase agreements protect buyers. For example, an offer might be contingent upon the findings of a home inspection or their ability to secure financing.

While seller contingencies are somewhat rare, they do exist — particularly in highly competitive markets.

Here are the three most common contingencies sellers can use to legally terminate a signed contract:

Attorney review period Short window (usually 3-5 days) in which attorneys can review a contract before it becomes bindingEither party can request modifications or void the agreement if they so chooseMandatory for all real estate contracts in New Jersey — must be stipulated in advance in other states

Home of choice Stipulates a period of time in which the seller can terminate the contract if they fail to find a satisfactory place to live

Bump (or kick out) clause If seller accepts an offer with contingencies, they can continue to market the homeShould they receive a better offer, they have the option to “bump” the original offer if that buyer fails to remove their contingencies

How Sellers can persuade buyers to cancel a purchase argeement.

Without a valid reason to terminate a contract, the seller can only get out of the sale legally if the buyer releases them.

There are two ways this typically happens:

• More common: The buyer backs out using one of their contingencies.
• Less common: Both parties mutually agree to cancel the contract.

Note that the seller can’t force the buyer into either of these options. However, the seller may be able to use specific tactics to encourage the buyer to walk away from the purchase.

Getting the buyer to walk away after an inspection.

Refuse to modify the contract after a low appraisal.

The seller may also be able to get the buyer to terminate the purchase agreement by refusing to modify the contract if the home appraises below the sale price.

This scenario could happen if the buyer’s offer is contingent on securing a mortgage. Lenders usually won’t approve a mortgage amount for more than the home is worth.

If the appraisal is lower than the purchase price, the sale could fall through unless:

• The seller lowers the sale price to the appraised value.
• The seller gives the buyer time to find a new lender.
• The buyer brings extra cash to closing (the difference between the purchase price and the loan amount).
• The buyer and/or seller convince the lender the appraisal report is inaccurate.

However, this scenario is rare. According to Federal Reserve research, fewer than 10% of appraisals come in below the purchase price.

What could happen if the seller improperly terminates a contract?

The buyer may sue the seller

If the seller breaches the contract, the buyer may sue for monetary damages or to force them to complete the home sale.

Monetary damages lawsuit

The buyer will most likely sue the seller for monetary damages. If the buyer wins, the seller could owe them compensation for expenses they incurred during the sale process and as a result of the breached contract.

State laws determine what specific costs the buyer can recover. They’re generally eligible for compensation for expenses like:

• Temporary housing costs
• Due diligence expenses
• Court fees

However, in some places, the buyer may be able to sue for additional compensation, especially if it’s clear the seller acted in bad faith.

Specific performance lawsuit

If a seller gets cold feet and tries to back out, a buyer may sue them for “specific performance.” If the seller loses this lawsuit, the court will force them to comply with the contract and sell the house.

Specific performance lawsuits are less common than monetary damages suits because most buyers don’t want to halt their relocation plans indefinitely while their case is in court.

The seller may be able to convince the buyer to walk away by refusing to renegotiate following a home inspection.

More than half of all real estate contracts include an inspection contingency, and 86% of inspections uncover at least one problem that needs to be repaired.

Buyers commonly attempt to use the home inspector’s findings to renegotiate their purchase agreements. They typically ask the seller to reduce the sale price or make repairs.

Sellers are under no obligation to make concessions, and if they refuse to alter the original contract, the buyer may back out.

However, if the inspection reveals the home is in good shape — or the buyer is highly motivated to purchase the home — they might proceed with the sale anyway.

Persuade the buyer to cancel the contract.

In the absence of any clear legal avenues to back out of the deal, the seller’s only option may be trying to persuade the buyer to cancel the contract.

This probably won’t be easy. At this point, the buyer has likely developed an emotional attachment to the home. Moreover, if they’ve already sold their current home, nixing the deal could leave them in need of temporary housing.

The most effective strategy to overcome those hurdles is one most sellers probably won’t like:

Offer the buyer cash. A lot of cash.

The seller holds virtually zero leverage in this situation. It’s hard to imagine any buyer would simply walk away without a significant incentive to do so.

The seller can also try to make an emotional appeal to the buyer. Sometimes, when sellers present a genuinely compelling reason they want to back out of the sale — e.g., new job fell through, death in the family, divorce, etc. — a more empathetic buyer might agree to release them from the contract.

However, if the seller is trying to back out because they think they can get a better offer, that’s probably not going to do the trick.

The agent may sue the seller

If the buyer has grounds for a lawsuit, it’s likely that the seller’s real estate agent does too. The agent’s broker may take the seller to court to compel them to pay the commission they would’ve collected on the sale, had it gone through.

That’s right:

The seller may have to pay realtor commission even if they don’t actually sell the home.

Listing agreements — the contract sellers signed with their agent’s brokerage — typically stipulate that sellers owe realtor commission if the property attracts a “willing and able” buyer.

So, as long as the buyer fulfilled their contractual obligations up until the seller breached the purchase agreement, a court could order the seller to pay whatever commission they agreed to — usually 5-6% of the sale price they negotiated with the buyer.

The buyer could file a legal claim against the seller’s title

If the buyer sues the seller, they’ll likely file a legal notice called a “lis pendens” on the property to publicize that the home’s title is subject to ongoing litigation.

It’s difficult to sell a home with a “lis pendens” especially for market value. The new owner would become liable for the result of the lawsuit, and few buyers want to assume that risk. And if the prospective buyer needs financing, they’ll probably be unable to secure loan approval until the “lis pendens” is removed.