Can a Seller Back Out of a Real Estate Contract Without Repercussions?

You’ve accepted an offer on your home, but instead of celebrating like most sellers, you start to experience serious pangs of regret. Despite your confidence in your decision to sell before, your deep love for this home — or perhaps a sudden change in circumstances — has made you second guess everything. You need an out from what appears to be an ironclad contract with your buyer. Are you stuck?

A table used to sign a real estate contract.
Source: (Andrew Barrowman / Unsplash)

Real estate contracts: Buyer’s dream, seller’s nightmare

Unfortunately, in the world of legally binding real estate contracts, it’s anything but easy for a seller to back out. While most contracts include escape clauses, those loopholes are generally built in to protect buyers, not sellers.

San Francisco-area agent Basil Yaqub witnessed this firsthand in a recent transaction where the seller changed their mind after the contract was signed. “The seller had to pay the buyer $20,000 just to get out of the contract,” explains Yaqub.

Considering the alternatives, which could include pricey legal fees, a lengthy court case, or being forced to move — this was an agreement Yaqub (who’s witnessed his fair-share of sellers try to backout over his 15 years in real estate) considered to be a “good” deal for the seller.

Top reason sellers need to back out

It’s “pretty common” for someone who sells their home to try to back out of the real estate contract, according to Los Angeles real estate attorney Zach Schorr. In his nearly two decades of experience representing buyers and sellers in litigation, these are the most likely reasons sellers attempt to renege their plans:

  • A higher offer comes in.
    Some sellers worry they accepted an offer too quickly, at too low of a listing price, or the home appraises for significantly more than it’s under contract for. If they could void the outstanding contract, they might be able to garner a higher offer. “It’s not a legitimate reason,” Schorr advises, “but it’s probably the most common.”
  • Change in circumstances.
    Whether it’s a relocation falling through, or the seller losing their job, a change in circumstances can make it hard, or close to impossible, for a seller to go through with the sale. When moving plans changed for Yaqub’s sellers, they decided it made more sense for them to try to stay in their current home then look for another in the same area.
  • Nowhere to go.
    The seller has failed to find a replacement home within the closing period, and would rather stay put.
  • Cold feet.
    The love a seller has for their home doesn’t just disappear when the contract goes into effect. The memories in the house or the appreciation of the neighborhood might be too strong to part with. Some sellers feel like they’re making a mistake as the closing date looms.
  • Disagreements with the estate. 
    If the home is being sold through an estate, tension among family members could lead to disagreements whether now is the right time to sell.

There are endless reasons a seller claims to try to back out of a signed real estate contract, but most of them don’t fall under the appropriate legal grounds to void a contract.

Source: (Brad Neathery / Unsplash)

When can a seller legally back out?

Legally speaking, it’s very challenging for a seller to back out once the contract has been signed, without facing some kind of blowback from the buyer. In the case of contracts, real estate law “heavily favors the buyer,” Schorr says. In his caseload, he rarely chooses to defend the seller, unless under the following circumstances:

Seller wrote in a home sale contingency

Sellers trying to buy and sell a home simultaneously will often include a contingency of sale in their real estate contract. In the case that the home they were purchasing falls through, they might have grounds to back out of the contract. This contingency only applies if it has been explicitly written into the contract.

Buyer fails to uphold their end of the contract

Ironically, a compelling case for a seller to back out has little to do with their actions, and more so with that of the buyer’s. If the buyer doesn’t meet deadlines outlined in the contract, such as securing a mortgage or performing the inspection within the agreed-upon timeline, the seller has grounds to cancel the contract.

Some real estate contracts include a time is of the essence provision, which stipulates that both parties are expected to fulfill the contract in an appropriate amount of time. “Many buyers don’t perform in a timely manner,” Schorr says, “and those can be big outs for the seller.” If that’s the case, the seller will want to pay close attention to dates and the buyer’s actions to build a compelling case to pull the contract.

Scams or hustlers were involved

In extreme cases, the seller might have grounds to back out of a contract if they’ve been swindled, or agreed to sell the house for an incredibly low price. Schorr’s experienced this in the case of elderly sellers getting offers from aggressive buyers. “These are extenuating circumstances, but I’ve represented between three to five sellers in cases like this over the past year,” he says. In his experience, the sales price has to be blatantly below the market value — a lowball offer won’t void the contract for the seller.

What about buyer contingencies?

Buyers typically build contingencies into the real estate contract by default. Your buyer will likely have the freedom to walk away at any three of these moments without losing their earnest money, effectively voiding the contract and giving the seller an out, too.

  • Inspection contingency
    If a buyer finds something they’re unhappy with during the inspection process and can’t make amends with the seller, they can walk away with no consequences.
  • Appraisal contingency
    If the appraisal comes in low and negotiations fall apart, the buyer has the option of backing out of the contract.
  • Financing contingency
    This protects the buyer in the event their mortgage falls through for any reason.

A seller can’t invoke any of these contingencies, but in the event that a buyer does, both parties walk away without repercussions. Most sellers would be disappointed to find themselves back at square one, but if you were looking for a way out, any willful cancelling on the buyer’s end using a contingency would be a blessing in disguise.

A court room used to settle a real estate contract.
Source: (David Veksler / Unsplash)

What happens if the seller cancels the contract?

Life happens, and a seller may have to cancel their contract, even if they can’t legally do so. In the event that a seller cancels their contract outside of the legal grounds, they can face some of all of the following scenarios:

The buyer can force the seller to complete the sale.

If the seller doesn’t have the legal ground to stand on and doesn’t want to take the case to court, they still may be forced into “specific performance,” legalese for completing the transaction. If the seller chooses to fight the contract, they’ll be entering a long legal process. In the event the buyer wins, the seller is legally compelled to sell the property to the buyer.

The buyer can sue the seller.

If the buyer believes the seller’s grounds for terminating the contract aren’t sound, they can take a seller to court and demand not only monetary compensation for the loss of the home but that the seller pays their legal fees.

“If the seller just decides to at the 11th hour to back out,” says Yaqub, “then the buyer can claim punitive and liquidated damages against the seller.” If a court can find that the seller acted in “bad faith,” the buyer may be entitled to compensation in addition to recovering the money they already spent on the property.

The buyer can place a lien on the property.

Since the buyer has a legal right to the property, they can file a lis pendens, or lien on the home. That means the buyer has staked their claim on the home and makes it nearly impossible to sell the home to any other potential buyers.

The listing agent can sue the seller.

Not only did the seller sign the contract for the sale of the home, but they also signed the listing agreement with their agent. Failure to complete the contract does give the agent grounds to sue the seller. If the listing agent takes legal action against the seller, the seller may be on the hook to pay the agent the promised commission on the property, even if the sale doesn’t take place.    

You may be forced to attend mediation.

In some states, like California, if the buyer and seller can’t reach an agreement around termination of the contract, they’re required to attend mediation sessions before heading to the arbitration courtroom. This could resolve the dispute with less legal fees than court, but will also draw out the process further.

Need to back out of a contract? Keep these tips in mind

Even if they don’t have the legal grounds to do so, circumstances might force sellers into backing out of their contract. Instead of jumping ahead to the courtroom follow these tips from our agent and attorney:

Appeal to your buyer, person to person.

If you feel comfortable sharing why you need to terminate the contract, your buyer might be more willing to sympathize and waive their legal case. In the National Association of Realtor’s Buyer-Seller Dispute Resolution System (DRS), the organization suggests the two parties try to resolve the issue in a negotiation process via their agents before roping in a neutral third party.

If sickness or a change in finances makes it necessary to keep your home, try explaining it to your buyer through your agent or attorney. These aren’t legally sound reasons for ending a contract, but the buyers may have compassion for your plight. Asking the buyer to see the experience through your eyes could help save you legal fees. If a buyer is sympathetic to the seller’s circumstances, they’re less likely to pursue legal action. It might just take reimbursing their expenses for the buyer to walk away.

Offer a refund, and more.

Don’t expect a buyer to walk away for free, especially if you don’t want to share your reasoning for ending the contract. On top of the costs the buyers have incurred in the closing process, you’ll need to offer some cash to let them down easy.

As Yaqub mentioned, his buyer was willing to part with $20,000 to ask the buyers to walk away from the deal. There’s no hard and fast number to offer, but sellers should be willing to negotiate if they want to keep the home. Think of it this way, if you can’t come to an agreement at this stage, you’ll have to try mediation or arbitration, where the costs start to skyrocket.

Sellers can legally back out of real estate contracts for a limited number of reasons, and even then, they could have an uphill battle ahead of them. Unlike taking your house off the market before you sign the offer, withdrawing from a purchase contract can cost a seller big time. But, if you’re willing to work with the buyer and negotiate, you may be able to avoid costly legal fees or a forced sale.

Disclaimer: This article is meant to be used as a helpful guide, and is not to be taken as legal advice. If you need legal help with a real estate contract, please contact a skilled real estate attorney.

Header Image Source: (Amnaj Khetsamtip / Shutterstock)