How to Tactfully Back Out of a Real Estate Contract
The goal of any real estate deal is for all parties to come away happy – whether it’s the home seller pleased with the profit, the buyer excited to start life in a new home or the real estate agents satisfied with the clients' success and their own commission.
But what if, before that deal closes, it doesn’t feel right anymore? For a variety of reasons, many people who may have felt confident buying or selling a home when they made an offer may now feel worried about a major change. In August, 15.2% of pending real estate deals were canceled before they closed – a total of about 64,000 contracts canceled nationwide, according to Redfin.
Whether the deal doesn’t seem quite as good as before or work, finances or other factors mean you need to stay where you are, there are opportunities to back out of a real estate contract. With the right contract contingencies and clear communication with your real estate agent, it’s possible to emerge relatively unscathed – as long as you don’t wait too long.
Here are seven scenarios that make it possible to back out of a real estate deal:
- Before you’ve gone under contract or during a “free look” period.
- When loss of income makes you ineligible for financing.
- When mortgage details are no longer affordable to you.
- When the house appraises for less than the sale price.
- When the inspection reveals significant problems with the house.
- If the buyer’s house can’t sell, the seller can use a “kick-out” clause.
- When you're willing to forgo some of your deposit to split amicably.
Before Going Under Contract or During a ‘Free Look’ Period
The easiest way to back out of a deal is to do so before there’s a deal to back out of. If you’re worried about your income, rising interest rates or that you may have to move elsewhere sooner than expected, play it safe. It’s OK to hold off shopping for a home until you’re more certain.
If you still want to go forward with making an offer on a home when you’re worried about needing to cancel the deal for any reason, a provision for a “free look” period may be able to protect you. This period often includes time for the buyer to conduct due diligence on the property, but the provision makes it possible for the buyer to back out for any reason without penalty.
The length of a free look period can vary based on what the seller will agree to, but Daniel F. Mantzaris, an attorney and partner at DSK Law in Orlando, Florida, a LegalShield provider law firm, recommends “as long a period as possible to basically get a free look” at the house, the rest of the market and any other details. Mantzaris says he often aims for 15 or even 30 days of a free look in real estate contracts when the market allows for it.
Loss of Income Makes You Ineligible for Financing
If you find yourself suddenly without work, getting a new mortgage won’t feel like the best idea, and your lender will agree with you.
If you’ve lost a job since you were preapproved for a mortgage and are now in the underwriting process to be approved for the loan, you are required to report the loss of employment, and the lender will almost certainly decline the loan for now.
Because financing issues are a major hurdle in a real estate transaction normally, this is a common place where deals fall through.
You’ll simply want to wait to start shopping for home again until you’ve regained stable employment and recouped any loss of savings you may have between jobs.
Mortgage Details Are Outside Your Budget
While you may be able to get pre-approved for a mortgage ahead of making an offer on a home, you often can’t get a rate locked until you’re under contract. With rising interest rates and volatile activity from week to week, it’s possible that rate lock is the difference between being able to afford monthly mortgage payments and not.
Pierre Debbas, partner and founding member of law firm Romer Debbas LLP in New York City, says it’s common for buyers of new construction properties to include a mortgage interest rate ceiling in the conditions of their contract, because there’s more time between the contract and completion of the project for a rate lock.
“I had a client sign in March and she said, ‘I want an interest rate ceiling at 6% – I’m not going to pay more than that,’” Debbas says. With the average interest rate for a 30-year, fixed-rate mortgage reaching 6.29% as of Sept. 22, such a ceiling could prevent a buyer from agreeing to a monthly mortgage payment she doesn’t feel comfortable with.
Of course, a competitive buyer atmosphere may make a contingency for interest rates difficult for any home purchase, new or existing. But “if the demand isn’t super competitive, I would certainly recommend interest rate ceilings,” Debbas says.
Inspection and Appraisal Issues
Home purchase contracts can include the contingency that the buyer (and lender) must be satisfied with the inspection and appraisal, the results of which could lead to further negotiations. “All contracts usually have those contingencies,” Mantzaris says.
It's possible for a property to appraise for lower than the agreed-upon sale price due to bidding wars or a seller's elevated asking price. When that happens, the buyer and seller must come to an agreement on how to proceed: Either the buyer pays more out of pocket or the seller agrees to come down in price. If no agreement can be reached, the buyer may choose to walk away from the deal.
A home inspection that reveals more issues than anticipated could leave the buyer less than excited to call the place home. If you’re not comfortable paying for major changes, or if the seller is unwilling to make repairs prior to closing, you can walk away from the deal.
It’s common for a real estate contract to guarantee the sale, contingent on the buyer’s ability to sell his or her current home or even the seller's ability to find a new one. As rising interest rates and high home prices limit affordability for buyers and discourage many homeowners from selling, many who are on the market may struggle to find the right home or buyer.
In such conditions, the other party can protect his or her best interests with a "kick-out" clause. Typically used when the buyer must sell an existing home before purchasing another, this clause allows the seller to continue showing the home while the buyer's home is listed. If the seller receives a better offer, the original contract can be terminated.
When backing out of a real estate deal, the worst thing you can do is wait. The second it feels wrong, you should let your agent know.
The buyer tends to have more options to terminate the deal throughout the contract period than the seller, as the contract typically includes easy exit points for the buyer if adequate financing is no longer available or costs become greater than the buyer is willing to take on. However, the deposit or earnest money paid – which can be fairly small, around $1,500, Mantzaris says – may have to be sacrificed.
But for the seller, backing out of a deal too late in the game can be considered a breach of contract, and the buyer can decide to sue the seller if he decides not to move forward. Sellers on the fence about moving should try to make a final decision before going under contract with a buyer.