Can You Get Out of a Real Estate Contract? Contingencies Explained

So I'm often asked, can I back out of a real estate deal that's under contract? Well, as with most questions when it comes to a legal matter, it really depends. Why? Well, in most real estate transactions, there are contingencies built into that buy-sell agreement or purchase agreement. These contingencies allow the buyer to back out of the contract under certain circumstances without forfeiting their earnest money. There are also contingencies that allow the seller to back out. So let's first start with the contingencies that really apply to the buyer. Number 1, financing contingency. This contingency allows the buyer to cancel the contract if they are unable to secure financing for the purchase within a specific timeframe. If the buyer's mortgage application is denied or if they cannot obtain a loan with the terms that are satisfactory to them, they can withdraw from the contract without penalty and get their earnest money back. Okay. Number 2, home inspection contingency. This contingency gives the buyer the right to conduct a professional home inspection, always recommended, to assess the property's condition. If the inspection reveals significant defects or issues that the buyer is just not willing to accept, they can negotiate repairs with the seller request a price reduction, or walk away from the deal and withdraw from the contract entirely. Okay. Number 3, appraisal contingency. With an appraisal contingency, the buyer can cancel the contract if the property does not appraise for the agreed-upon purchase price. If the appraisal value is lower than the contract price, the buyer may renegotiate with the seller or request a price reduction, or again, terminate the contract and walk away from the deal entirely. Okay. Number 4, a title contingency. A title contingency allows the buyer to withdraw from the contract if there are issues with the property's title, such as undisclosed liens, easements, or ownership disputes. If there's any sort of cloud on the title or problem with the seller's ability to provide marketable title, it's called, then the buyer can walk away from the deal. The buyer typically has a specified time period to review that title report and address any concerns with the seller. If you're interested in knowing quite a bit more about title insurance, the role of title companies, what actually goes into researching title, Check out my video I did with Alex Eicher from Palin Title Group. I did a video podcast type interview. I'll put a link to that in the description. There's a lot to know when it comes down to the work that title companies do and why that's important to both the seller and the buyer in a real estate transaction. Okay, now number 5 contingency on the buyer side, a home sale contingency often can come into play. If the buyer needs to sell their current home in order to purchase a new property, they may include what's called a home sale contingency in the contract. This contingency allows the buyer to cancel the contract if they are unable to sell their existing home within a certain time frame. Number 6, property use contingency. This contingency allows the buyer to verify that the property can be used for its intended purpose, such as residential, commercial, agricultural use. If zoning restrictions or other limitations prevent the buyer from using the property as desired, they can withdraw from the contract. I have some good advice for buyers in this situation, especially in a really hot seller's market. Use this contingency to tie up the property while you investigate all of these issues surrounding it. Otherwise, you could find yourself poring through pages and pages or making your real estate agent do it. I do it just all of the time for my clients. You can be poring and poring through pages and pages of zoning ordinances, HOA documents, etc., while someone else is getting ahead of you and getting the property under contract and then using a contingency like this one to do their due diligence instead of doing it before they make an offer. My advice, make sure that the seller is willing to sell it to you at X price before spending a lot of time, effort, money researching whether or not you can use the property in the way that you intend to use it. Get it tied up first. Number 7, insurance contingency. A buyer may include an insurance contingency to ensure that they can obtain adequate homeowner's insurance coverage for the property. If the buyer is unable to secure insurance or cost is prohibitive, they can cancel the contract. All of these contingencies provide buyers with important protections and opportunities to conduct due diligence before finalizing the purchase of a property. It's essential for buyers to carefully review and understand the terms of these contingencies and to stay within the timeframes specified within the contract. And for that, you you should really be working with a knowledgeable and experienced real estate agent or real estate attorney. Now let's talk about seller contingencies, contingencies that apply to sellers on contracts. And you'll notice that oftentimes the very same contingency that works in the buyer's favor to be able to get out of a contract and get their earnest money back, that same contingency can offer the seller an opportunity also to get out of the contract. Okay. Number 1, appraisal contingency. This contingency allows the seller to cancel the contract if the property does not appraise for at least the agreed-upon price. If the property appraises for less than the contract, then the seller can choose to renegotiate with the buyer, but does not have to. They can just say, look, we agreed at this price. It's not my problem that the appraisal came in lower. And then the, the that, that's what's called mutually releasing the contract. If the buyer's not willing to pay above the appraised price and meet their originally agreed upon price, or if they're not able to because of financing concerns, etc., then the deal can be broken. So from the seller side, just because if you agreed to, let's say, a sale price of $500,000 and it comes in and only appraises at $480,000, You do not have to lower it to $480,000, but you can break the contract and continue to market the property. So you can do that or you can seek a second appraisal. You can terminate the contract. And by the way, I get this question a lot related to appraisals. Appraisals are done with private individuals. They're licensed appraisers. There is not a clearinghouse or there's not a hub where one appraisal— appraiser shares his appraisal results with another appraiser and they compare notes. If one appraiser comes in and does it, that, that information is, is kept confidential with that appraiser and whoever ordered that appraisal. So getting another appraiser to come in later, they're not going to know at all what this appraiser appraised it at.— and I have had instances where appraisers can be quite far apart on their appraisal. So remember, it is what's called an opinion of value from a licensed appraiser. And sometimes those opinions can differ from appraiser to appraiser. So that is an option for the seller. Instead of walking away and breaking the contract, you can ask for another appraisal. Of course, who pays for that appraisal is part of the negotiation. So, okay, number 2, home purchase contingency. If the seller needs to sell their current home in order to purchase a new one, they may include a home purchase contingency in the contract. This contingency allows the seller to back out of the sale of this existing home if they're not able to put a new home under contract within a specific time frame. I have run into this quite often, in fact, helped my nephew through this very same situation. And there's a great hesitancy on the part of sellers that I think, especially in the Traverse City area in Leelanau County, is not really necessary. A lot of people are looking for the right home, the right fit, and they don't need to occupy it right away. They're buying a second home. I helped my nephew, for example, sell He, he needed like a mother-in-law's apartment or a second living space. And his current home in Cedar did not offer that. And in a great, great seller's market, we tried looking for homes and getting them under contract. And because we had this home sale contingency, just could not win any offer. We were just up against tougher competition. So instead, we put his house up for sale with a home purchase contingency. Got it under contract right away. The buyer of his home was buying— their daughter was going to the Interlochen Arts Academy. They wanted a place to come visit and not have to stay in a hotel room. You find a lot of that in home purchases up here, that they don't need to move in right away. So sellers out there that you feel like you need to sell your current home before purchasing a new one because you either want to upsize or downsize or right-size or whatever, for this is a good strategy and it's not the detracting factor that you might think. Okay. Number 3, inspection contingency. Just like an inspection contingency allows the buyer to back out of the deal, it can also allow the seller to back out of the deal because it allows sellers to cancel the contract if the buyer's home inspection reveals significant defects or issues with the property. The seller may have the option to address those concerns, negotiate repairs, or terminate the contract. Now, one caveat with this out there, sellers, is that you're under contract. The buyer does this inspection. They provide you with the results of the inspection, and that inspection reveals significant defects that you did not know anything about. And that happens a lot. Okay. Part of the Seller's Disclosure Act is that you must disclose known defects. Okay. And not all sellers know all of the defects. There may be leakage into a crawl space, but you've never gone down in the crawl space. I had a client with that situation, shot a whole separate YouTube video on that as well. There may have been a roof leak that you're not aware of. However, once you're under contract and this buyer brings you an inspection report, and shows you the defects and that causes this contingency comes into effect. Now you do know. And so now you need to update your seller's disclosure statement. So most of the time when I'm working with sellers in situations like this, I remind them of that. But now, you know, now we need to disclose that to future buyers. If it's an issue with this buyer, it's likely to be an issue with future buyers. Just keep that in mind. I had a situation, for example, in my opinion, it was kind of a— it was a way for the buyer to get out of the contract using the inspection when it really wasn't a concern at all. And that was they used a radon test result to get out of a contract, even though the radon test was well below the threshold that is a cause for concern. They said, well, it's, it's significantly higher than the current residence that we live in. The radon is higher even though it didn't meet the threshold that health experts deem the threshold of concern. So that's one thing to also keep in mind is that buyers may have concerns that you don't share as a seller or that to most reasonable people would not consider them to be a concern. But if they're a concern to that buyer, they really don't need to give you as a seller much justification. If they receive an inspection, they don't like it, they can break the contract and, and get out of it. But in this case, you know, as a seller, you can also do that. I just think you have to really think deeply about doing— breaking a contract because of that buyer's home inspection report. Okay, next, 4, financing contingency. The financing contingency allows the seller also to back out of the sale of the contract if the buyer is not able to secure financing. Let's say the buyer makes an offer, you agree to it, they're not able to get financing, but they say, well, you know, we can get it right around the corner. My benefactor is about to die and leave me a bunch of money. But you as a seller don't want to be tied up to that uncertainty about how long it will go. So if that buyer hasn't satisfied the financing contingency within the specified time frame in the contract, or if their mortgage application is denied, or they cannot obtain a loan within the terms satisfactory to the seller within that time frame, then the seller may terminate. The contract. Okay. Number 5, title contingencies. Just like buyers can back out if there's something, a cloud over the title, or if they're not able to provide a clear title or marketable title, so too the seller can back out. Okay. Sellers may include a title contingency that allows them to cancel the contract if there are issues with the property's title, such as undisclosed liens, encumbrances, or ownership disputes. The seller typically has a specified period to resolve any of these title issues or to provide the clear title to the buyer. If they're not able to do that, then the seller can also walk away from the deal. Okay. Number 6, home repair contingency. If the seller agrees to make certain repairs or improvements to the property as part of the sale agreement, they may include a home repair contingency. This contingency allows the seller to cancel a contract if they are unable or unwilling to complete the agreed-upon repairs, or if the cost of those repairs exceeds a certain threshold. Number 7, leaseback contingency. In some cases, sellers may need to remain in the home for a period of time after the sale closes. A leaseback contingency allows the seller to rent back the property from the buyers for a specified period, giving them time to find alternative housing. Whether you're a buyer or a seller, if you're trying to get out of the contract without a valid reason— in other words, not within one of those contingencies— if, if one of those contingencies is in place, that is a valid reason. Okay. But if you try to get out of the contract without a valid reason, Here are some consequences. Number 1, breach of contract. If you terminate a contract without good reason or not within one of the applicable contingencies mentioned above, you may be considered in breach of contract. This could entitle the buyer to seek legal remedies such as suing you for specific performance. In other words, forcing you to complete the sale or seeking monetary damages. Okay, um, that applies to both sides, by the way. The buyer can sue for specific performance, or the seller can also sue for specific performance. Number 2, loss of earnest money. In many real estate transactions, the buyer provides earnest money as a deposit to demonstrate how earnest they are about purchasing the property, thus the term earnest money. It's a demonstration of how serious you are in your pursuit of the purchase. If the seller terminates the contract without cause, then the buyer is going to at least get their earnest money back, if not be able to sue for specific performance. But if the buyer breaches the contract or fails to fulfill some of their obligations or misses timelines, then the seller may be able to keep that earnest money as compensation for damages. In most real estate contracts, however, there's some language around mediation, arbitration. How can we sort out any dispute without it going directly to a lawsuit? And there's a commitment to— built into those contracts to try those steps first before getting to the big bad lawsuit. Number 3, legal recourse. If the buyer believes you wrongfully terminated the contract and suffered financial losses as a result, then they can take legal action against you to recover damages. This could include reimbursement for an inspection, reimbursement for appraisal fees, and other expenses incurred in preparation for the sale. Number 4, reputation damage. Terminating a real estate contract without a valid reason can damage your reputation as a seller to attract future buyers. Word gets around among real estate agents. Okay, Traverse City area in Leon County is a small town, so potential buyers, real estate agents, and industry professionals may view you as an unreliable or untrustworthy seller, which could impact your ability to sell the property in the future. Before terminating a real estate contract, it's essential to carefully review the terms of the agreement consult with a qualified real estate attorney and consider the potential consequences. If you have concerns or issues that arise during a transaction, it's best to communicate openly and effectively and attempt to resolve those issues with the buyer through negotiation or mediation whenever possible. As long as you've been acting in good faith and a contingency hasn't been satisfactorily met, you should be able to back out of a contract in general. If you're not sure what good faith means in a real estate contract, then I've shot a whole nother YouTube video on that. I'll leave it in the comments. We get into a little bit of detail about what exactly good faith is in real estate contracts. All right. If you have a question, any question at any time, shoot it to me. I might shoot a video specifically answering it or I might just text you an answer back or email you back. But anyway, any questions that you have about real estate, shoot them to me. I answer them. I'm Sander Scott, your full-service realtor.