Home Buyers: How And When To Exit A Real Estate Contract
By Paul Esajian on February 3, 2016
Can home buyers get out of a real estate contract after it is signed? If so, how do they do it?
It’s a common question and concern. Can you gracefully exit a purchase and sales contract once you’ve executed one? If so, when is the best time to back out? What is the right way to cancel a real estate purchase?
7 Common Reasons Home Buyers Want to Back Out
1. Nervous about moving
2. Find better looking deals on other properties
3. Escalating costs to close
4. Inability to get the mortgage loan they hoped for
5. Negative turn in personal or business finances
6. Market changes
7. Property condition or improvement costs
7 Reasons Not to Back out of Contracts Once You’re In
1. You’ve given your word
2. You’ve signed a legal and binding contract
3. You could be sued by the seller
4. Potential for losing your deposit
5. Maintaining your reputation in the industry
6. Important to stay objective, not emotional
7. You may not actually get a better deal somewhere else
Can You Back out of a Real Estate Contract?
Wanting to cancel and walk away from a real estate deal and the legalities of doing so can be two very different things.
Generally, you can’t just choose to walk away. The answers are normally in your real estate contract. There may be qualifying contingencies which provide an amicable exit. For example; the property may be in much worse condition than expected. Or you may not be able to get mortgage financing, the property may not appraise for enough, or there may be title or association issues. These can all be legal outs, though they need to be acted upon quickly.
In order to get your earnest money deposit back, you’ll have to live up to the contract and secure a written cancellation and release of deposit.
Getting Advice
Always seek out pro advice when considering cancelling or walking away from a real estate contract. Be wary about relying only on the input of your mortgage company, the title company, and Realtors. The vast majority are only motivated by securing their own paychecks. That means they’ll try to keep you in the deal, use various scare tactics and threats of lawsuits to keep you in the contract, and eventually reveal that they are not your real friends, just sales people. Realtors want their commissions, title companies want their fees, and mortgage loan officers want to get paid. All regardless of whether the deal makes sense to you or is fair or not. There are certainly shinning exceptions to this, but do be prepared. For this reason it certainly makes sense to consult a real estate professional who is not a part of this transaction. This might include a great real estate attorney, and for investors – a real estate coach. Time is of the essence. The quicker you move, the more likely you are to trim expenses, get your deposit back, and avoid bigger lawsuits. These experts may even help you renegotiate or save the deal.
The Deciding Factors
Back tracking on a real estate deal is rarely an easy decision. In fact, it is notoriously harder both mechanically and mentally to get out, than to get in and push forward.
Once you’ve assessed all the above, the final decision comes down to two factors:
1. What is the Right Thing to Do?
What is the right thing? Do you keep your word, even though you aren’t as in love with the deal anymore? What would you like the buyer to do if you were the seller or listing agent? This may not be the easiest or cheapest route in the short term, but it is about more than the few thousand dollars on the line.
2. What’s the Best Thing to Do?
Make sure you do all of the math on this deal, on your overall finances, and beyond. Perhaps your issue is that your mortgage company jacked your rate up from an original quote of four percent to five percent and tacked on an extra three grand. You may want to walk out on principle and because the payments will be higher than expected. If this is to be a personal residence, you may never hope to get a better interest rate. As a rental, if the numbers put you in negative cash flow, and you are likely to lose the property to foreclosure because of it then it may be worth walking away, even if you lose your deposit. But not if you could be sued for 100,000 dollars. Others might see it is their responsibility to protect the long term integrity of the industry by refusing to fall for bait and switch lending tactics. Then it is entirely possible that if you try to do the nice thing and tell the seller your financing fell through, they might try to sue you, versus just letting the clock run out on the contract.