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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 the purchase and sale agreement, then wants to cancel the deal? Is it legal? And what are the buyer’s options in that case?
Let’s look more closely at when and how home sellers can back out of a contract.
Is a seller legally 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 in their obligations in some way.
Why home sellers might want to back out of a sales contract
Sellers may have a variety of reasons for trying to back out of an accepted offer. 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, all purchase offers, counteroffers and acceptances should be in writing and signed. 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 — in theory. But it’s not official until it’s put down on paper, and signed by each party involved in the transaction.
“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.”
Consequences for sellers who back out of contracts
Backing out of a home sale can have costly consequences. And legally speaking, it can be very difficult to do once a real estate contract, officially known in most places as a purchase and sale agreement (P&S or PSA for short) has been signed.
The language of real estate contracts is typically written to protect home buyers. And 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.
The seller may also be ordered to:
- Return the buyer’s earnest money/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 often has to pay the buyer’s legal fees, as well as his own, says Schorr. “That could be a harsh penalty.”
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.
When can a home seller back out of a contract?
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.
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.
Or say a contingency is explicitly included in the contract that the seller be able to secure a new home, and then they are unable to do so. In such circumstances, the seller may have legitimate grounds to walk away from the sale.
Short of a contingency, sellers can cancel due to “the buyer’s failure to perform,” Schorr says.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.
Ways sellers can back out of a contract
1. Finding out the buyer failed to secure funding.
If the buyer can’t get a mortgage, the seller is typically not required to continue the sale. You have the right to be paid the agreed-upon price and would not be at fault for backing out when you can’t get it.
2. Building contingencies into the contract.
Most real estate contracts have contingencies that give sellers cause to back out. For instance, the seller may say they will only sell their property if they can purchase a new home for themselves within 30 days. If they are unable to find a property, they can cancel the sale of their current home per the contract.
3. Taking advantage of attorney review.
Many contracts include an attorney review period. Usually a few days long, the period gives either party the chance to back out of the contract because their lawyer notices a problem.
4. Coming to a mutual agreement.
In some cases, simply asking the buyer to cancel the contract may work. If the seller doesn’t have cause, the buyer is not required to agree to ending the contract, but it doesn’t hurt to ask.
5. Calling out a fraudulent statement from the buyer.
If you can prove there is a scam afoot, you may also be able to cancel a sale. For instance, if a potential buyer takes advantage of an older seller by offering a lowball offer, the sale may be permitted to be canceled for cause.
Buyer’s options if a seller backs out of a contract
A buyer who has a 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 and sales agreement, they are on pretty solid ground and should have every expectation of closing on the home.
Bottom line on backing out of contracts
“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.” Reneging because you fear you underpriced the house, or you actually receive a better offer, doesn’t count as “cause.”
Of course, the onus is on the buyer to hold you to the contract. But if they really want the property, they may well do so — and a pending lawsuit could cripple any other transactions you try to make (like selling to someone offering more money). 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.