Can a Buyer Back Out of a Home Purchase Contract?

Ever have a buyer client that wanted to back out of their contract? Share the article below with them to help them understand the legal ramifications and what their options are:

In an intense seller's market, it's not unusual to see buyers waive contingencies or place an offer on a house sight unseen -- both of which can lead to buyer's remorse. Once a buyer's offer is accepted by the seller, the buyer is contractually obligated to the home purchase. Or are they? When you're in the market to buy a home, it's important to know the options you have to get out of a contract without facing legal troubles. Not all options alleviate the risk though, so here's what could leave a buyer off the hook — and legally vulnerable — in the event you want to walk away.

Inspection Contingencies

One of the most common contingencies in real estate is known as an inspection contingency. A home inspection contingency essentially states that the purchase of a home is dependent on the results from the home inspection. The right to an inspection exists to protect buyers from purchasing a home with substantial (and potentially expensive) faults. However, the right to inspect must be specified in the purchase contract in order for a buyer to have the opportunity to inspect. This critical contingency often provides buyers with the opportunity to terminate a purchase if they are not satisfied with the inspection and condition of the property.

In this intense seller's market with bidding wars becoming more common, some buyers have opted to forego inspection as a way to stand out from the crowd and maximize the chance theirs is the offer that's accepted. The risk in this strategy is that a buyer could purchase a home with several substantial problems and looming repairs. While it may help you win a bidding war, foregoing the inspection contingency will often offer more risk than reward. By keeping an inspection contingency in the offer, buyers could potentially back out of a contract.

Appraisal Contingencies

Without a doubt, the most common contingency that buyers are waiving right now is the appraisal contingency. In many markets, appraisal gaps have become a common tool buyers use to negate a low appraisal. And while including an appraisal gap can certainly help an offer compete against the crowd in a multiple offer scenario, it's a risky strategy for buyers. Appraisals exist to ensure buyers don't overpay for a home and also offer an "out" for buyers if the home appraised for less than the purchase price.

Typically, when an appraisal comes in low, buyers have the opportunity to back out of the contract or negotiate a lower purchase price. However, if buyers include an appraisal gap in their offer, they could potentially lose the ability to terminate based on appraisal.

Other Reasons a Buyer Might Back Out

And while inspection and appraisals are the common reasons for backing out of a contract, there are certainly other scenarios that arise that cause a buyer to terminate:

• Time Is of the Essence – In every contract, there are typically deadlines for both the buyer and seller to meet. If a buyer has fulfilled their obligations but the seller has not and the transaction does not close on time, a buyer could potentially back out of the purchase.
• Death of the Buyer – In many states, if the buyer dies prior to closing, the purchase is terminated. It's important to consult an attorney if the estate has any obligation to complete the purchase.
• Loss of Job – Most contracts that involve the buyer obtaining a loan include a financing contingency. If a buyer is unable to obtain loan approval, then this contingency typically gives them the right to terminate since they are not able to financially purchase the home. Beyond credit issues, a common reason for loan denial is when the buyer loses a job during the course of the transaction prior to closing.
• Specific Contingencies – For example, if a buyer makes an offer sight unseen, they can include a contingency that the offer is subject to their viewing and approval of the property. If they aren't satisfied, they may be able to back out. Other specific contingencies can exist on a case-by-case basis, so consult your real estate agent.

Things to Know BEFORE You Back Out of a Contract

Keep in mind, as a buyer, you've signed a legally binding contract. It's critical to read the entire contract and all the fine print before signing and making an offer to the seller! While there are quite a few protected scenarios where a buyer can legally back out of contract, there is also an important legal term buyers should be aware of: specific performance.

A simple change of heart about purchasing a home may not be legally protected and could subject a buyer to a specific performance lawsuit. If a buyer wishes to terminate a contract, it's critical to consult a licensed attorney about the legal ramifications of that decision before terminating. It's important to note that even if you're working with a buyer's agent, they are not allowed to give legal advice.

If you or anyone you know is in the market for a new home, check out the Homes.com comprehensive How To guides that walk you through the home buying, selling, and financing process step by step.

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