Buying a home is a major life milestone. If you’ve been renting or living with your parents, buying your first home is an opportunity to put down your roots while building equity. If you’re already a homeowner, moving into a new home means new neighbors, a new neighborhood, and a new place to make memories. Sometimes, though, you may go under contract before coming to a horrible realization: This isn’t the right house for you. Maybe you discover major issues through inspection or maybe your lender has an issue with the appraisal. Whatever it is you, you may find yourself wondering: What happens if I back out of the real estate agreement before closing?
The answer is a complicated one. Although you can back out of buying a house before closing, you could lose thousands of dollars or even open yourself up to lawsuits, depending on the circumstances.
Backing out is a situation we try to avoid with our clients, which is why we spend so much time educating our buyers and sellers about the process and the choices available to them. But if you ultimately determine backing out of a real estate deal is right for you, understanding the real estate process in as much detail as possible could reveal how much risk you’re taking.
5 Reasons Why A Buyer May Want to Back Out Of Buying A Home
There are a variety of reasons why you might suddenly change your mind about a home that seemed absolutely perfect only a few days ago. Some of the most common reasons we’ve seen:
1. You discover more problems than expected during the inspection. In most cases, we find the inspection is the biggest reason buyers want to back out of a purchase. When a buyer is disappointed with what they find, they may be reluctant to move in, especially if they’ll have to invest in improvements.
Fortunately, we can help buyers overcome their hesitations. Ted and I have lived in many different places, and we’ve flipped many different houses. We understand the sweat equity necessary to transform a home, and we can make recommendations on how much work you’ll actually need to perform to get the house where you want it to be.
2. There’s an issue with the appraisal. There are a couple of different conflicts that could occur from the buying side. For example, if the appraisal comes well under the asking price, your mortgage lender may be hesitant to loan you the full amount.
Whatever the issue, this can be an uncomfortable and complex situation, and some buyers would simply prefer to walk away than iron out the issue with everyone involved.
3. You get cold feet. Even if the house seems like the perfect place to live and is within your budget, buying a home is an enormous financial decision. It’s perfectly normal to feel overwhelmed by the transaction.
And although you shouldn’t make an offer on a home before you’re really ready to buy, these things happen. If you get cold feet, your agent should alert the buyers before the offer is accepted. If you move too slowly, the offer could be accepted and signed, and then you’re legally bound to buy the house (although, as we’ll discuss later, there are a few ways out).
4. They’ve made an unfavorable counter offer. So, you’ve decided it’s the right house, you’ve discussed it with your real estate agent, and you make an offer on the home.
Unfortunately, the owner comes back with a counteroffer that makes the deal less appealing to you.
You don’t have to accept the counteroffer, and you don’t need to counter with another offer. You can walk away if you’re uncomfortable with their terms.
5. The house doesn’t pass one of the contingencies or there are terms that aren’t honored. As we’ll discuss, most contracts include a few different contingencies, such as not passing the inspection or uncovering an issue with the title.
If a house fails to meet all of the contingency requirements, you could back out of the deal without facing consequences.
The same goes for terms that aren’t fully honored by the seller. For example, if the seller doesn’t fully complete a repair to the agreed-upon standard, you would be within your rights to back out of the sale.
Backing Out of A Purchase Agreement: Understanding What Matters Most
When you’re ready to purchase a house, you’ll sign a purchase agreement outlining the terms and conditions of the sale.
This purchase agreement is designed to protect everyone’s interests during the sale, both yours, as the buyer, and the seller’s. This agreement allows you to back out of an unfair deal, but it also legally commits you to the sale—making life easier for the seller.
Once the agreement is signed, you’ll likely pay a deposit of 1%-3% of the offer to show you’re committed to the sale, and these funds generally go toward the downpayment or the closing costs.
However, if you back out of the agreement, the seller may choose to keep the money. On a $200,000 home, that means you could lose anywhere between $2,000 and $6,000 just by walking away—unless you leave the deal because a contingency wasn’t properly met.
Contingencies: How to Back Out of A Real Estate Purchase Without Consequences
As we mentioned above, most home purchases have built-in contingencies that allow the buyer to walk away if the home is discovered to be less desirable than it was previously presented. Most of these contingencies have a limited window in which you can exercise them, so pay close attention to the fine print!
List of Contingencies That Can Help You Back Out of Buying A House
Here are a few ways you may be able to get out of buying a house:
1. The inspection doesn’t go well. If the inspection uncovers something seriously wrong with the house, like an urgent need to replace the roof, you may realize that safely moving into the home could require significant costly repairs.
In this scenario, you would be excused if you decided to back out of buying the home.
2. The appraisal goes unexpectedly. When you start shopping around for homes, your mortgage lender will approve you to a certain dollar amount—and they’ll want the home to be appraised before giving you money. That could potentially lead to problems.
Let’s say you’re approved up to $200,000, and you make an offer for $200,000 on a home. As part of standard operating procedures, the house is appraised, but it’s appraised for only $180,000. That likely means your lender is only willing to offer you $180,000.
But you’ve already committed to $200,000, which would mean you’re now $20,000 short!
You have two options: You could find a way to cover the extra $200,000, perhaps by digging into your savings or retirement plan (not necessarily a recommended strategy!), or you could back out of the deal altogether.
3. The mortgage falls through. Your lender offers you a mortgage after carefully reviewing your financial health and history. Based on your past income and career path, they’re making an educated prediction that you’ll be capable of dedicating a certain amount of your income each month toward paying off your mortgage.
But what happens if you or your spouse suddenly become unemployed? A loss in income may make your lender less willing to work with you—and that sort of hardship could allow you to back out of the deal.
4. Your home doesn’t sell. Sometimes, you enter a real estate transaction with the understanding that you’re buying one home intending to sell the one you’re living in.
This isn’t always that simple. If your home fails to sell, you’ll miss the cash that comes along with it, and that could mean you’re responsible for two mortgages at once—something that can be prohibitively expensive for many families.
In short, your home failing to sell could potentially get you out of buying a home.
5. Title discrepancies. The title information on your property states who truly owns the property, and a title search can even uncover liens and unpaid property taxes.
Issues that pop up during the title search could excuse you from committing to the home.
Can I Be Sued for Backing Out of Buying A House?
The short answer: Yes. It’s unlikely, however. In most cases, the seller will receive the money from the earnest deposit (the 1%-3% you put down to show you’re serious about purchasing), and then they’ll move on to another buyer.
If anything, you’re more likely to be sued as the seller if you suddenly back out of a deal you accepted.
In general, though, suing over a residential real estate transaction is unlikely. Some states even require home purchase agreements to have a clause requiring mediation in the event of a dispute. In these situations, a neutral mediator will help resolve any issues between you and the seller, and that is usually enough to keep the issue out of a courtroom!
Find Help For Buying Your Next Home
If you’re looking to buy a home in the Pittsburgh region, contact us! Send us an email at theblocks@blocksintheburgh.com to explore your options.
Cheers,
Julie & Ted