3 Top Reasons Why Sellers Sue Buyers for Backing Out of Home Sales
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It’s a thrilling experience to have your offer accepted by a seller. You’ve won your dream home, and you can’t help but get swept away in plans for your new abode. But for some buyers, that excitement can quickly turn to anxiety when it comes time to sign the purchase contract. What if you want — or need — to back out of the deal? Will you lose your deposit? Or worse, can the seller sue you as the buyer for backing out of the deal?
Once you and the seller sign the purchase agreement, things start to get real. You now have skin in the game in the form of your earnest money deposit, plus you have a legal duty to buy the home (barring certain circumstances).
We talked to veteran real estate agent Laura Wallace, who’s worked with 80% more single-family homes than the average agent in Memphis, Tennessee; she walked us through the ins and outs of what happens when a buyer backs out of a contract. Here’s what you need to know.
Can a seller sue a buyer for backing out of a deal?
There are several ways you may be able to safely back out of a real estate deal, depending on the terms of your contract with the seller. Basically, your options hinge on two things:
- Why you’re backing out of the deal
- Which contingencies you included in your contract with the seller
What are contract contingencies? They’re protective clauses you put in your contract with the seller that allow you an out if certain conditions of the sale aren’t met.
For example, if you can’t get a mortgage for the home, it’s unlikely you’ll be able to fulfill your end of the contract; without a mortgage, you can’t pay for the house. So as a buyer, you should have a contingency in your contract to protect you in case you can’t get proper financing for the home.
Contract contingencies are used in most real estate contracts, and it’s not entirely uncommon for deals to fall through. According to the latest data from the Realtors Confidence Index (RCI), 76% of purchase contracts contain contingencies, and around 7% of contracts are terminated.
All in all, contingencies can protect you and your earnest money deposit if certain conditions of the contract aren’t or can’t be met.
Common contract contingencies that let buyers back out of the deal
Before you begin to make offers or sign any contract, you should talk with your real estate agent and attorney (if you’re using one) to decide what contingencies to include in the real estate contract.
There are four common buyer contingencies: financing, appraisal, inspection, and home sale. They each have unique functions and features meant to protect buyers.
A financing contingency allows you to back out of the purchase contract if you can’t get a mortgage for the home. If you think about it, this contingency makes a lot of sense. If you can’t secure financing to pay for the home, that doesn’t leave you any way to buy it. (Unless, of course, you have several hundred thousand dollars laying around.)
Say you make an offer on a home and it’s accepted by the seller. Then, as you’re in the process of completing your financing and closing on the home, you’re laid off from your job. This could cause your lender to refuse you a mortgage.
Issues with financing are fairly common in home sales. According to recent Realtors Confidence Index (RCI) data, 27% of real estate contracts that are terminated fall through because of financing.
If you have a financing contingency, you’re protected. You can back out of the deal if your lender can’t close your loan, plus you’ll get your earnest money deposit back.
Appraisal contingencies are also related to getting your mortgage. In order to get a home loan, your mortgage lender needs to make sure they don’t lend you more money to buy the property than it’s worth.
To that end, during the mortgage process, your lender will send a neutral third-party appraiser out to the property to assess its value. The appraiser will also look at recent sales in the area to get “comparables” so they can get an idea of what you should pay for your home.
If the appraisal comes in lower than what you agreed to pay for the home, you could be on the hook to make up the difference yourself, or have to renegotiate with the seller.
For example, let’s say you offer $250,000 for a home, and your offer is accepted. The lender sends out their appraiser, and the appraisal company decides the home is worth $220,000. You’re now on the hook for that $30,000 gap if you want to buy the home.
If you still really want the home, you could decide to pay the difference yourself, or renegotiate the price with the seller.
Or, if you have an appraisal contingency, you can walk away from the contract, and you and your earnest money are protected. Appraisal issues are responsible for 9% of terminated real estate contracts, so this can be a smart contingency to have in your agreement.
Just like your lender wants to protect their investment, as a buyer, you’ll want to get a home inspection to protect yours. A home inspector is hired by the buyer to go through the property, take a detailed look at everything, and inform you of any problems.
Issues like a damaged roof or a cracked foundation can significantly affect the value of a home. With an inspection contingency, you have the opportunity to request repairs or credits (this is when a seller takes money off the price of the home so you can make the repairs yourself) for anything that comes up with the inspection. If the seller refuses, you can walk away without penalty.
Home inspection and environmental issues account for 20% of failed purchase contracts, so this is an important contingency to protect yourself when you buy a home.
Home sale contingency
Buying a new home and selling your old one simultaneously can complicate things. What if you make an offer on a new home, but you can’t sell your current home in time to complete the deal? Enter the home sale contingency.
A home sale contingency gives you a set amount of time to sell your current home before you close on the new home. If you aren’t able to sell your current home in time, you can back out of your contract with the seller. That’s because it would likely be impossible for you to actually purchase the new home without freeing up the money that’s tied up in your current home.
When can a seller sue you for backing out of a home sale contract?
If you back out of the contract for reasons that aren’t stipulated by your contract or its contingencies, you could be out your earnest money — or, in extreme cases, you could even be sued by the seller.
There are few instances that could put you at risk of a seller-driven lawsuit.
1. You don’t exercise your contingencies within the timeline of the contract
Purchase contracts tend to have very specific and important timelines to ensure closing isn’t delayed.
For example, after inspection, you typically have a week to negotiate with the seller, or pull out of the deal. If you miss this window, you could lose your deposit, or the seller could sue you.
2. You get cold feet
Unfortunately, changing your mind isn’t usually a contingency covered by your purchase contract. Walking away because of cold feet can be a costly decision to make.
3. You decide to purchase another home instead
This is treated similarly to cold feet.
Once you’re under contract, you shouldn’t be making offers on other homes. If you decide to move forward with a different seller, your earnest money with the first seller could be at risk, or you could get sued.
“If you decide to wake up one day, and just say, ‘You know what, I don’t want to buy this house anymore,’ unfortunately, you are in a binding contract,” Wallace shares. “And if you have completed your contingencies, there’s no reason or way for you to be able to back out.”
What happens if you get sued by a seller?
If you back out of the deal for any reason that’s not stipulated in your contract, the seller could show up to the closing table without you and sue you for specific performance. That’s when a court requires you to fulfill your end of the contract, and buy the home anyway.
However, Wallace explains, getting sued by a seller is an unlikely scenario.
“Some sellers may threaten the other party with a lawsuit,” she says, “but in our market, 99% of the time, the seller does not sue the buyer. Still, it’s possible.”
One reason it’s unlikely a seller will sue a buyer? Most of the time, a home that’s tied up in a lawsuit can’t be sold until the lawsuit is cleared. That’s because the issue of ownership is up in the air, which can cause title issues when it’s time to pass the deed from one owner to the next.
Avoiding a lawsuit and finding another solution — whether through arbitration, surrendering your earnest money to the seller, or settling out of court — is usually in everyone’s best interest.
If you’re planning to back out of a real estate contract for any reason, it’s best to talk to an experienced real estate attorney about your options.
Plus, as Wallace cautions, there is one reason a seller might sue: They’ve already spent so much money on the sale and moving to their next location that they can’t afford not to sue. Although she adds that this is still an uncommon scenario.
If you’re nervous about committing to a purchase contract, it may hearten you to learn that buyers rarely back out because of cold feet.
“As for someone just wanting to walk away because they don’t want the house,” Wallace says, “it just doesn’t happen very often.”
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Chelsea Levinson Senior Copywriter