Ways home sellers can legally back out of the contract
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 the sale closes. But what if the seller wants to back out? Is it legal? What are the buyer’s options in that case?
It’s “very, very common” for home sellers to renege on buyers, especially in a hot real estate market, says Zachary D. Schorr, lead attorney at Los Angeles-based Schorr Law, APC, which handles real estate litigation. 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 and typically you would rather be on the buyer side,” Schorr says. “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” by missing a deposit or closing deadline, for example.
A word of warning to sellers: “If you’re selling a property, you shouldn’t enter into a contract unless you are going to sell it,” Schorr says. There’s not much room to have doubt or second thoughts. The buyer has ways out, but the seller really doesn’t.”
Why do home sellers renege on sales contracts?
Sellers may have a variety of reasons for trying to back out of an accepted purchase agreement. Among them:
- The seller gets a higher offer from another buyer.
- The seller has been unable to find a suitable replacement home.
- The seller loses a job or a family member dies, making it financially difficult to move.
- The seller has emotional ties to the house and can’t let go.
- There is a disagreement within the seller’s family about leaving the house.
- The property appraises for more than what the buyer has offered.
Why it’s crucial to get everything in writing
The first thing that both home sellers and buyers should know is that 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 (home) owner,” Schorr says. “An oral agreement is generally not binding. A contract to sell real property is required in writing.”
Backing out of a home sale can have costly consequences
A home seller who backs out of 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 also may be ordered to:
- Return the buyer’s good faith deposit, plus interest;
- Pay back fees the buyer shelled out 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.
Since breach of contract is a civil matter, a seller need not worry about jail time, however. “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 — in other words, 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 he has a place to move to. Or the seller can give himself 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 failed to perform.”
One way in which buyers fail to perform is not being able to get a mortgage. “If, for some reason, the buyer’s lender does not appraise the home at a value that would secure financing, the seller is not required to negotiate and can cancel the contract for the buyer’s lack of performance in terms of securing financing,” says Susan Chong, founder of Denver-based Iconique Real Estate, a brokerage in the luxury market.
A remorseful seller who wants to back out after a sale has closed has no chance of succeeding since the title, money and everything else have been transferred at closing and they no longer own the property.
“If the seller has a reason that they still need to occupy the home after the closing, they can attempt to lease back the property from the buyer,” says Chong.
What are homebuyer’s options when the buyer reneges?
A buyer that has a purchase contract with a seller who wants to back out should consult a real estate attorney. If the buyer wants to take it to court, they can sue the seller for breach of contract. Legal redress against a seller can be expensive and time-consuming, however, and 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.
Buyers should understand that as long as they 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.
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