Selling a house can be expensive, complex and time-consuming, so it’s a huge relief to everyone involved when a deal is struck and a contract is signed. But what if the seller signs, then wants to back out? Is it legal? And what are the buyer’s options in that case?
Is a seller allowed to back out of a contract with a buyer?
The answer to this question is not exactly straightforward, says Zachary D. Schorr, lead attorney at Los Angeles–based Schorr Law, APC, which handles real estate litigation.
“It depends on the situation,” says Schorr. “Generally, if the buyer is not performing, then the seller can cancel the contract, provided the seller has complied with the provisions in the contract regarding notice to the buyer to perform.” Instances of failure to perform could include missing a deposit or a closing deadline, for example.
Schorr also points out that home sellers backing out is “very, very common,” especially in a hot real estate market. Even when the seller doesn’t have a clear legal right to renege on a deal, it can still happen.
“I do these cases all the time, but it’s generally a very tough case for the seller,” he says. “Typically, you would rather be on the buyer side. It’s easier for a buyer to cancel and hard for a seller to get away without a penalty.”
Buyers have the upper hand, because most contracts for a home purchase contain provisions that protect them and keep the purchase process moving along. Sellers who want to renege have an uphill battle, unless a buyer fails to perform.
Why home sellers might want to back out of their sales contract
Sellers may have a variety of reasons for trying to back out of an accepted purchase agreement. Among them:
- If the seller gets a higher offer from another buyer.
- If the seller has been unable to find a suitable replacement home.
- If the seller loses a job or a family member dies, making it financially difficult to move.
- If the seller has emotional ties to the house and can’t let go.
- If there is a disagreement within the seller’s family about leaving the house.
- If the property appraises for more than what the buyer has offered.
Be sure to get everything in writing
When it comes to real estate, it’s smart to protect yourself. All purchase offers, counteroffers and acceptances should be in writing and signed by each party agreeing to the contract. Typically, when the seller accepts the buying party’s signed offer or counteroffer and communicates that acceptance to the buyer, a binding agreement has been reached.
“Until there is a contract, there is no obligation on behalf of the homeowner,” Schorr says. “An oral agreement is generally not binding. A contract to sell real property is required in writing.”
Are there consequences for sellers who back out?
Yes: Backing out of a home sale can have costly consequences. And legally speaking, it can be very difficult to do once a contract has been signed. The language of real estate contracts is typically written to protect home buyers. Legally, a seller’s best bet for successfully backing out of a sale is if a contingency written into the contract has not been met. For example, say a contingency is explicitly included in the contract that the seller be able to secure a new home, and then he or she is unable to do so. In such circumstances, the seller may have legitimate grounds to walk away from the sale.
However, in many cases, a home seller who reneges on a purchase contract can be sued for breach of contract. A judge could order the seller to sign over a deed and complete the sale anyway. “The buyer could sue for damages, but usually, they sue for the property,” Schorr says.
A seller often has to pay the buyer’s legal fees, as well as his own, says Schorr. “That could be a harsh penalty.”
The seller may also be ordered to:
- Return the buyer’s good faith deposit, plus interest.
- Pay back any fees the buyer paid for inspections and appraisals.
- Pay for lost equity the buyer may have realized from the home.
- Pay any other reasonable expenses the buyer incurred.
- Reimburse the listing agent for the lost commission and marketing costs.
A seller who wants to avoid a court fight could offer to pay the buyer enough to make them whole and hope they will agree to exit the deal.
However, since breach of contract is a civil matter, a seller need not worry about jail time. “There is generally no criminal liability for breaching a contract,” Schorr says.
How can the home seller avoid penalties?
Home sellers can give themselves an “out” by adding contingencies to the sales contract that make the sale contingent upon certain conditions. For example, a seller can make the sale contingent upon having a contract to buy another house, so they have a place to move to. Or the seller can get contractual latitude by adding a time frame or deadline for all purchase offers.
“Generally, a seller can’t cancel without cause,” Schorr says. “You could build in some contingency, but absent that, you had better be committed to the sale. There has to be a contingency, or the buyer’s failure to perform.”
One common way in which buyers fail to perform is not being able to secure a mortgage. “If, for some reason, the buyer’s lender does not appraise the home at a value that would secure financing, the seller can cancel the contract for the buyer’s lack of performance in terms of securing financing,” says Susan Chong, principal broker for Denver-based Iconique Real Estate, a brokerage in the luxury market.
What are a buyer’s options if the seller reneges?
A buyer who has a purchase contract with a seller who wants to back out should consult a real estate attorney. If the buyer wants to take the case to court, they can sue the seller for breach of contract. Legal redress against a seller can be expensive and time-consuming, however, and it may not result in a satisfying conclusion.
“A prudent move for the buyer would be to record a lis pendens, a document you can file to let the world know that somebody, the buyer, is claiming interest in a property,” Schorr says. “This makes the property not marketable” and puts a stop or hold on any transactions on the property.
As long as buyers live up to the terms of the purchase contract, they are on pretty solid ground and should have every expectation of closing on the home.