Terminating a real estate contract: instructions, risks, consequences
- If you make an offer on a home, a real estate contract details the terms of the sale.
- Sometimes buyers have to cancel the contract because of financial difficulties or problems with the house.
- The consequences of canceling a contract depend on whether or not there are contingencies in place.
Most people who make an offer to purchase a home do so with the intention of completing the transaction. But things happen and sometimes home buying deals fall through.
Rising interest rates, affordability challenges, and even issues with the home itself can make buying less attractive than when you originally decided you wanted it. But before going back on your contract, it’s important to understand the potential financial and legal consequences.
What is a real estate contract?
A real estate contract is a legally binding agreement outlining the terms and conditions of a real estate transaction. When a buyer wants to buy a new home, their agent sends an offer letter detailing the terms offered.
A real estate contract usually includes the following details:
- Buyer and seller information
- Property Details
- house price
- Funding Information
- honest money deposit
- All contingencies under which the sale may be terminated
- Estimated closing and possession dates
If the seller accepts the buyer’s offer, the house is officially under contract and both parties will sign the house purchase agreement.
Can a buyer terminate a real estate contract?
Both buyer and seller can opt out of a home purchase agreement, although buyers usually have more options. The ease with which it is possible to withdraw from a purchase contract generally depends on the wording used in the contract.
And there can be financial consequences to canceling a real estate contract. For example, you risk losing your deposit unless there are contingencies in place that protect you.
When terminating a house purchase contract can make sense
According to Hayley Tomazic, real estate broker and founder of Curated Properties, there are many reasons why a person may need to cancel the purchase of their home. One of the reasons contracts are often canceled is a failed home inspection.
“If the buyer finds something material about the home, like a structural deficiency they weren’t aware of, they can choose to cancel,” she explains.
Buyers may also be required to terminate the contract if they lose their job or are unable to obtain financing. The buyer could also be forced to cancel the contract if the house is not valued at the agreed price.
Withdraw from an agreement with contingencies
As a buyer, it’s easier to put off buying a home because of unmet contingencies. The following contingencies are typically included in a home purchase agreement:
- Funding: A financing contingency allows you to reverse the purchase if your financing fails. For example, if you lose your job and your financing fails, you will no longer be able to buy the house.
- Home inspection: This eventuality allows you to reverse the sale if the home inspection reveals problems with the home. You can either renegotiate the price, ask the seller to make improvements, or opt out altogether.
- Evaluation: If the home’s valuation falls below the amount you offered, you can forfeit the purchase.
- Selling your current home: Some buyers will have a contingency stating that purchases can only take place after they have sold their existing home.
- Title: Your mortgage lender will require a title search before closing to ensure there are no issues with the property. If the title search reveals an ownership dispute, you have reason to withdraw.
Withdraw from a sale without contingencies
When the market favors sellers, some homebuyers may waive contingencies to make their offer more competitive. While it can sometimes work in your favor, waiving contingencies has repercussions if you want to opt out of your contract.
For example, you will lose the deposit you have invested in the house. You’ll also lose any money you’ve ever spent on services like a title search or home inspection.
When is it too late to terminate a home purchase contract?
According to Tomazic, it is too late to cancel the contract once all the eventualities have been resolved. If you withdraw from your contract, the seller can either release you from the contract of sale or sue you for specific performance.
And once you close the property, you are the new owner. “If you were to discover serious issues that were not disclosed, you may have the option of suing the previous owner for not disclosing material issues, but you can no longer cancel the contract at this point,” he said. said Tomazic.
What are the consequences of terminating a real estate contract?
As a buyer, you stand to lose the most financially if you cancel a real estate contract, especially if there are no contingencies in place. You will lose your deposit and any money you spent on an appraisal, home inspection or other services.
For the seller, the real risk is that “the financial consequences of a return to the market are unknown”, explains Tomazic. “They may not attract the same amount of interest after they return and get a lower sale price with worse terms.”
And depending on the wording of the contract, the buyer could sue the seller if he feels that the reasons for canceling the contract are not justified.
The bottom line
Buying a home is a big investment, and you want to make sure it’s the right decision for you and your family. If you’ve suffered a job loss or are concerned about issues with the home, leaving might be the right choice.
If you are considering making an offer on a home, it is important to include some contingencies in the contract. Things happen and real estate contracts fail, “that’s why contracts have contingencies in place that allow them to cancel,” says Tomazic.