When Can a Buyer Cancel a Home Purchase Agreement?
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Richard Haddad Executive EditorClose
Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
Buying a home is rarely done with casual disregard. You’ve planned, juggled finances, worried about finding the right house, and then you finally sign a contract. But what happens if you’re now facing the decision of submitting a buyer cancellation of the purchase agreement?
In this guide, we’ll break down what you need to know about buyer cancellation of a purchase agreement. From the initial understanding of what a home purchase agreement is, to the reasons why buyers may back out, and the steps involved in cancellation. We’ll also review the legal and financial repercussions that can follow.
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Disclaimer: As a friendly reminder, this blog post is meant to be used for educational purposes, not legal advice. If you need assistance navigating the legalities of canceling a purchase agreement, HomeLight always encourages you to reach out to your own advisor.
What is a home purchase agreement?
A home purchase agreement, often referred to as a real estate contract, is a legally binding document between a buyer and seller outlining the terms of a property sale. This comprehensive document details everything from the purchase price, down payment, and financing terms to contingencies, closing dates, and any specific conditions both parties must meet before the sale can be finalized.
At its core, the agreement serves as a roadmap for the transaction, providing a clear outline of what is expected from both the buyer and seller to ensure a smooth transfer of ownership. It includes key elements such as:
- Property details: The address and legal description of the property.
- Sale price and terms: The agreed-upon price for the property and the terms of the payment, including the earnest money deposit amount and financing details.
- Closing and possession dates: When the sale will officially close and when the buyer can take possession of the property.
- Contingencies: Conditions that must be met for the sale to proceed, such as home inspections, financing approval, and the sale of the buyer’s current home.
- Signatures: Legally binding signatures from both parties, indicating agreement to the terms.
Reasons buyers back out of a purchase agreement
Buyers may decide to back out of a home purchase agreement for various reasons, including both personal circumstances and issues arising from the property itself.
Danielle Moy is a top Chicago area real estate agent with more than 16 years of experience. She says buyer’s remorse is something she’s seeing more often in the current housing market.
“That’s the main reason that I see a buyer wanting to cancel after they sign [the purchase agreement]. They have buyer’s remorse after talking to family or a lender, reevaluating their monthly payment, and then realizing it’s higher than they expected. They want to wait till the rates drop a little bit before they continue their search.” Moy adds, “We’ve seen a lot of people even back out before they drop off the earnest money.”
Here’s a quick look at common factors prompting home buyers to back out of a purchase agreement:
- Financing issues: Buyers struggling to secure a mortgage or facing unfavorable loan terms may opt to cancel the purchase.
- Home inspection findings: Discovery of significant problems during the home inspection can deter buyers, especially if repairs are costly or the seller is unwilling to address the issues.
- Cold feet: The sheer magnitude of buying a home can lead to second thoughts, causing some buyers to reconsider their decision.
- Appraisal concerns: If the property appraises for less than the offer price, it can jeopardize financing, prompting buyers to back out.
- Personal circumstances: Changes in family dynamics, or financial situations can influence a buyer’s capability or interest in proceeding.
- Loss of employment or income: A sudden job loss or reduction in income can drastically affect a buyer’s ability to finance the home, leading to cancellation.
- Unable to sell current home: Buyers contingent on the sale of their current home may need to withdraw if they cannot sell within a specified timeframe.
- Seller fails to make promised repairs: If a seller agrees to make certain repairs before closing but fails to do so, a buyer may choose to back out.
- Undisclosed defects or property issues: Discovering previously undisclosed problems with the property can lead buyers to reconsider their purchase decision.
- Unresolved title issues: Encumbrances or disputes related to the property’s title can complicate the sale, prompting buyers to cancel the agreement.
To get a better feel for what’s happening in the current market, HomeLight surveyed more than 1,000 of the nation’s top-rated real estate agents. Here is what they cited as the most common reasons buyers are canceling deals after a contract has been signed.
What is an option period?
The option period is a specified timeframe within a real estate contract during which the buyer has the exclusive right to terminate the agreement for any reason. Typically lasting from a few days to a couple of weeks, this period allows the buyer to conduct thorough due diligence on the property, including obtaining inspections and appraisals, without the risk of losing their option fee, although the fee is often non-refundable.
The key features of an option period include:
- Flexibility: The buyer can walk away from the purchase with minimal financial loss, typically forfeiting only the option fee.
- Negotiation opportunity: Based on findings during the option period, buyers can renegotiate terms or request repairs from the seller.
- Time-bound decision making: The limited duration encourages timely decision-making and progression toward closing or cancellation based on the findings.
Steps for a buyer cancellation of a purchase agreement
Canceling a purchase agreement as a buyer involves several steps, often dictated by the terms of the agreement itself and state laws.
Some states require a real estate attorney to conduct the closing of a home sale. Others are considered “attorney states,” where licensed attorneys participate in the buy-sell process as a matter of custom and practice. Such is the case in Moy’s home state of Illinois.
Moy explains the initial steps: “After signing, if a buyer wants to cancel a home purchase agreement, they would first have to tell me [their agent] and their real estate attorney, and then their attorney will send out a legal letter to the other party involved on the selling side, the other attorney would then have to present that to their seller and see if the sellers and agreement based upon the reasoning.”
Here’s a general outline of the process:
- Review the contract: Identify any contingencies or clauses that allow for cancellation without penalty, such as financing, appraisal, or inspection contingencies.
- Consult with a real estate attorney: Before taking any action, it’s advisable to seek legal advice to understand the implications of cancellation and ensure the correct steps are followed.
- Notify the seller in writing: Any decision to cancel should be communicated through a formal notice, detailing the reasons for the cancellation and referencing the relevant contract clauses.
- Negotiate the release of any earnest money: Depending on the contract terms, you may be entitled to a full or partial refund of your earnest money deposit. This often requires negotiation with the seller or their agent.
- Execute a termination agreement: Both parties must sign a termination agreement to officially end the contract, which outlines the terms of the cancellation, including any financial settlements.
- Consider the option period: If within the option period, follow the procedure for notifying the seller of the decision to cancel, often simpler and with a predetermined option fee loss.
Termination vs release of purchase agreement
Termination and release are two distinct actions in the realm of real estate contracts, each with its own implications:
- Termination: This is a unilateral action taken by one party, such as the buyer, under certain conditions that legally allow for it. For instance, a buyer may terminate the contract if an inspection reveals significant issues and the seller refuses to make necessary repairs, provided there’s an inspection contingency in place.
- Release: This action requires mutual agreement between buyer and seller, effectively freeing both parties from their obligations under the contract. A release is often sought when the buyer lacks a contractual basis for termination, but the seller agrees to let them out of the deal, possibly in exchange for the buyer forfeiting the earnest money deposit.
Consequences when a buyer cancels a purchase agreement
Canceling a home purchase agreement can carry significant consequences for the buyer, especially if not done within the legal boundaries of the contract.
“If the buyer backs out due to not being able to get the financing, or something happens during the final walkthrough that they’re not happy with, or something’s not repaired the way it was supposed to be (what they asked for during the inspection period), then they may have every right to back out and get the earnest money back,” Moy explains. “However, if they back out just because they have a change of heart about the property, they will likely not be able to get that earnest money back.”
Here are some of the repercussions that can happen when a buyer cancels a purchase agreement:
- Loss of earnest money deposit: Buyers often risk forfeiting their earnest money deposit to the seller if they cancel the contract without a legally valid reason.
- Legal action from the seller: If the seller believes the cancellation is unjustified, they may pursue legal action against the buyer for breach of contract, seeking damages or specific performance (forcing the sale).
- Impact on future home purchases: A history of contract cancellations can affect a buyer’s reputation among sellers and real estate agents, potentially making future home purchases more difficult.
When can a buyer cancel without consequences?
There are specific circumstances under which a buyer can cancel a purchase agreement without facing financial penalties or legal repercussions. These situations can vary depending on state laws, but they typically revolve around unmet contingencies cited in the contract.
Moy provides some examples for her Illinois market: “If the buyer orders a home inspection, and the home inspection comes back poorly, you can back out within the first five business days, and then there are no consequences — they could get the earnest money back. Or, if they can’t buy the house anymore because they can’t afford the mortgage — maybe they lost their job — they could get their earnest money back because [most agreements] are contingent on financing as well. Or, if the final walkthrough goes poorly (like the property is not in the same condition it was), that would be another reason.”
Here’s a look at common contingency clauses that can allow a buyer to cancel a purchase agreement without significant consequences:
- Finance or mortgage contingency: Allows the buyer to cancel if they’re unable to secure financing or a mortgage approval within a specified timeframe.
- Home inspection contingency: Permits the buyer to withdraw if significant defects are discovered during the home inspection that the seller refuses to repair.
- Appraisal contingency: This enables the buyer to back out if the property appraises for less than the sale price, potentially affecting loan approval.
- Home sale contingency: If the buyer cannot sell their current home within a set period, this contingency allows them to cancel.
- Title contingency: Provides an out for the buyer if unresolved title issues are discovered, such as liens or disputes over property boundaries.
Moy advises buyers to take advantage of contingency clauses to protect themselves, and include safeguard timeframe requests. “They can put it in the contract, she explains. “If they want extensions for contingencies, they can say that instead of five business days for the attorney review and inspection period, they want ten days — just to give them a little bit more flexibility to back out if needed.”
FAQs on buyer cancellation of purchase agreement
You can back out of buying a house without severe consequences up until the point all contingencies in the contract are met or waived, and you proceed to closing. Once you close on the house (signed and sealed), the sale is considered final, and backing out is no longer an option. It’s important to understand the timelines and conditions of your contract’s contingencies to know your last opportunity to exit the agreement legally.
If the buyer backs out of the transaction for reasons not covered by the agreement’s contingencies, the earnest money typically goes to the seller as compensation for the breach of contract. However, if the buyer backs out due to a failed contingency, like a poor home inspection or inability to secure financing, they are usually entitled to a refund of their earnest money.
The specific time frame a buyer has to legally back out of a contract depends on the contingencies outlined within the agreement. For example, a financing contingency might give the buyer 30 days to secure a loan. If the buyer cannot fulfill this condition within the specified time, they can back out and potentially reclaim their earnest money. Always refer to the contract for specific timelines related to each contingency.
A homebuyer can sue a seller after closing if they discover undisclosed defects or if the seller intentionally hid problems that affect the property’s value or livability. Legal action can be pursued based on fraud, breach of contract, or violation of disclosure laws. It’s vital to consult with a legal professional to assess the viability and potential success of such a lawsuit.
Yes, a home seller can initiate legal action against a buyer if they fail to close the transaction without a legally valid reason. The seller may seek damages for breach of contract, including the potential loss of sale, costs associated with relisting the property, and any difference in sale price if the property sells for less the second time. The specific remedies available depend on the contract terms and local laws.
Real estate agents can play a pivotal role in resolving disputes between buyers and sellers, often acting as mediators to facilitate negotiations and find mutually agreeable solutions. Agents with training in dispute resolution, such as those trained to use the National Association of Realtors DRS (Dispute Resolution System) program, are particularly skilled in these situations. In a combined program, the DRS clause can be included in an agreement to provide for a two-step process in an effort to help buyers and sellers resolve disputes out of court, first through mediation and then — if mediation is not successful — arbitration. While agents can help avoid litigation, it’s sometimes necessary to consult with legal professionals for resolution.
A top agent can get you to the finish line
Whether you’re facing challenges with a purchase agreement or need help finding the right property, a top real estate agent is your ally in reaching the finish line successfully.
HomeLight can connect you with the top-rated agents in your selected market, ensuring you have the professional support to make informed decisions and achieve your real estate goals.
In closing, Moy offers this advice to buyers: “Work closely with your agent. Make sure you know what your monthly payments are going to be. Make sure you consult with your lender and family prior to making the offer. That way, when you make the offer, you’re ready, and you’re able to actually close on the deal. You also won’t face the issue of wanting to back out for no reason or getting buyer’s remorse.”
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