Can a Seller Back Out of a Real Estate Contract​

Shaking hands over real estate contract

Can a Seller Back Out of a Real Estate Contract

Real estate investors must know how a real estate contract works. As an owner or operator in the commercial and residential real estate industry, understanding the limitations, liabilities, and rights of a real estate contract can make or break your investment’s success. 

What if the property gets damaged while you are under contract? Or the appraisal comes back below your offer price? What if you find a different property worth buying and want to back out? 

These questions—and many more—can only be addressed if you deeply understand real estate contracts and how to navigate their legal ramifications. In this article, we’ll discuss whether or not a motivated seller can back out of a real estate contract.

What Is A Real Estate Contract?

A real estate contract is a binding agreement between two parties of a real estate transaction. Let’s assume Billy the Buyer wants to buy an investment property from Sally the Seller. How do they go about the sale? Billy and Sally will discuss the right price and negotiate which appliances, if any, are included in the purchase. Once they complete their negotiations—which can take a few days or a few months—they put it in writing and lock it into a real estate contract. 

Within the real estate contract, Billy and Sally determine in what circumstances the purchase agreement would be considered null and void. In doing so, they permit either party to back out of the transaction. These assumptions are called contingencies and will be discussed in more detail in the next section. However, if all goes according to plan, the real estate contract is a binding agreement between the two parties. It renders the buyer obligated to pay the seller for the property at the stated price.

So, what are these contingencies? What circumstances can permit a seller from backing out of a deal?

Can A Seller Back Out Of A Real Estate Contract?

Although a contract is typically binding, there are circumstances in which a seller can back out of a contract. 

Generally, within a real estate contract, the buyer and seller embed certain contingencies that, if not met, allow either party to back out. Some of the major contingencies include:

  •  Financing contingency
  • Third party report contingency (i.e. appraisal and/or inspection)
  • Insurance contingency

If, for whatever reason, the appraisal comes back very low, the house is unable to get insurance, or the buyer is unable to secure financing, either party can back away. Additionally, if the buyer breaches the contract and fails to perform or move forward with the process, the seller can also back out.

Why Sellers May Back Out Of A Real Estate Contract

Generally, United States federal laws favor the buyer over the seller. So, even if a seller happens to find a better offer on the market and wants to back out of the signed contract, it isn’t always easy to do so. Part of the purpose of a contract is to ensure a sense of accountability, making it challenging for a seller to walk away. However, despite some of these challenges, there are still a few reasons why a seller would want to walk away from a sale. 

For instance, a seller might encounter a significant life event like a death in the family that would allow them to either renegotiate the sale or back away. Additionally, there is generally an attorney review grace period that each seller and buyer get once a contract is signed. If, during this time, a seller is having second thoughts and wants to back out, many states allow for it.

Legal Reasons Why A Seller May Want To Back Out Of A Contract

On the legal front, there are a number of reasons why a seller may want to back out of a contract. First, a contract is only binding when it is signed. If a buyer does not sign the agreement or they sign it after the agreement expires, a seller can legally walk away. Second, a seller may want to back out if they can’t find another home to live in. This clause is not in every contract, but if a seller is selling a primary residence and is looking for a new home, they should include this clause. No seller wants to be stranded if they sell their home but can’t find a new one to live in. As long as this clause is added to the agreement, the seller has a legal right to back away. 

Another reason is if the buyer is in breach of the contract. In real estate, time is money. If a buyer and seller go under contract and agree to close on the deal within 8 weeks, it better close within 8 weeks. If the buyer isn’t holding up their end of the arrangement by ordering the appraisal, inspection, and home insurance in a timely fashion, the seller can back away. The seller is in no way obligated to extend the purchase window if the buyer doesn’t act hastily.

Final Thoughts

A purchase agreement is a binding agreement between a buyer and seller within a transaction. Generally, the law requires owners and buyers to abide by this contract to encourage fair business practices. However, there are a number of circumstances where a seller would either want to, or have the legal right to, back out of a contract. Although it isn’t so easy to walk away just for the sake of walking away, the seller can back out if the buyer isn’t holding up their end of the agreement. This can include a breach of contract or if any one of the many contingencies baked into the agreement are not being met.

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