When you buy a house, it’s a big decision. You don’t just wake up one morning and decide you’re going to buy a house, then pick the first property you see, do you? Of course not! Buying a house isn’t like buying a t-shirt or some candy. It takes a well-thought out decision, one that has you likely looking at numerous properties for weeks, even months.
So, when is it too late to back out of buying a new house?
It’s too late when you get to the contract stage, particularly once they are signed and exchanged.
It’s certainly not a decision you’d enter into lightly. For the moment that you exchange contracts with the seller of that property, it is too late to turn back. If you back out after this point, you’ll lose much more than your deposit. The seller can sue you! You may be served a notice that requires you to pay for the seller’s legal costs and pay interest on the unpaid purchase price. Ouch!
Right now, it’s a good time to understand the consequences of backing out when you’re buying a house. If you keep reading, I’m going to tell you all about what could happen and what you can do in the event you find yourself in this situation.
Backing out of buying a house after making an offer
What you should know about backing out of buying a house after you make an offer is this: a real estate offer is not binding. That includes whether it’s made orally or in writing. So even if a seller has accepted your offer, formally and in writing, you aren’t legally bound or obligated to purchase that home at all (depending on your state).
Yes, even if you were the offer that won out on the bidding process, your winning offer doesn’t bind you to the home. Promises made orally are cannot be legally enforced in the real estate sales world. Inconvenient to the seller? Perhaps. But they will find someone else from the offers they received or reopen bidding again.
You won’t have to face any hard feelings either. All you do is have your real estate agent tell the listing agent you’ve changed your mind and that your offer has been withdrawn. If there’s any disappointment, you won’t see it. That’s why real estate professionals do what they do.
And even if you had begged that seller (or had your real estate agent do so on your behalf) and your offer was accepted, it’s STILL not legally binding. At this point, you are free to rescind the offer any time whether it was before the seller accepted it or after. You should also know that even if you don’t notify the seller, perhaps going in it alone without an agent, you are still not bound to the offer.
State laws vary so you should check to see if there are any provisions where you live or where you plan to purchase. Going with a real estate agent can help you navigate the buying process and allows you to pawn off rejection onto someone else.
Why might you do this? If you suddenly found a home you loved a few blocks away with a better price or perhaps your company just promoted you and you’ll need to now move to another state, or for any number of reasons, you can suddenly change your mind and withdraw your previous offer.
Now, if you make a purchase offer and it is accepted as it is, it may very well become a binding contract for sales which is called a purchase agreement. Sometimes, it is referred to as an earnest money agreement or even a deposit receipt. This offer then should include every facet needed to create the final sale.
What you should see on it are the following items:
Legaldescription of the property. Saleprice for the property.
- Terms of the contract (is it all-cash or is there a mortgage for a specified amount?).
- Seller’s promise for a clear title for ownership.
- The target date for the closing, which is the actual sale.
- Amount of money deposit that accompanies the offer in check, cash or promissory note, as well as how that money will be returned to you should your offer be rejected or kept for damages if you back out of the binding deal with no proper reason.
- How the real estate taxes, any rent, water bills, utilities, fuel
and othersmiscellaneous costs are to be prorated or adjusted between both the buyer and the seller.
- Notes about who is paying for title insurance, inspections, and surveys.
- Type of deed.
- Any state-specific requirements which may require an attorney’s review as well as a disclosure of any environmental hazards of clauses for your particular state.
- The time limit, usually a short one, for which the offer will expire.
- Any contingencies (keep reading and I’ll explain those).
So a binding contract has all of these things and you saying, “Yes, I want to buy this house! Take my offer! No, wait, never mind. I’ve decided not to buy it,” does not legally adhere you to the property in question (again depending on the state).
Keep reading and I’ll tell you more about what happens when you back out of a purchase agreement which is all that stuff listed above.
Backing out of a purchase agreement
When you have a written and signed purchase agreement, this is a legally-binding document. If you attempt to back out after this has been signed, it is going to get a bit complicated and messy. Once this paper has been fully executed and then signed by the seller after you sign it, it’s so much harder for you to back out of it.
You will really need to think hard about changing your mind if that’s what you decide. That’s because 10% of the purchase price of that property will usually be held as a contract deposit so you’ll likely lose out on money if you decide to back out of buying this property after all this signing has taken place.
This deposit, often referred to as a ‘good faith’ deposit usually sits in escrow with the seller’s own attorney. If you must back out of this mutually-executed purchase agreement, your lawyer will need to negotiate certain contingencies into that contract that will then be activated. So if it comes to this, you can either choose to waive the contingency and remain in this deal or forfeit the contract deposit.
Because both sides have signed the document, it is extremely complicated and I don’t advise doing this at all. You’ll lose money and no one wants that. But it’s a bit different if you make a contract and sign it but it hasn’t been signed by the other party. Read on!
Backing out of buying a property after signing the contract
Now let’s suppose that you’ve signed the contract but changed your mind before you had your lawyer send it over to the seller or to his attorney. In that case, you may be able to get out of buying the property. It’s a bit risky and something you really shouldn’t do unless absolutely necessary, but your attorney has a duty to serve your interests.
Basically, it’s like when you go to write a check for a bill and you accidentally write the wrong information on the check as you fill it out. What would you do with that check? You’d void it out, right? Perhaps you’d even rip it up into little pieces like I do. This is the same thing. So if you sign that contract but your lawyer hasn’t sent it over for signing by the other party, destroy it and decline the purchase. There’s no proof you signed it, especially if you just shred it and forget it.
Of course, I must insist that in this situation as well as any other one that requires signing a contract, you never should do so without speaking with your attorney. Contracts are legally-binding pieces of paper and signing them frivolously is never a good idea.
You should always go over everything and ask your lawyer all your questions first before inking your signature. After all, what if your lawyer sends a copy of the signed contract over to the seller’s attorney while omitting the deposit and you suddenly decide you’ve had a change of heart? When that happens, it becomes much more complicated. You’d be in breach of contract at this point if they decide to counter-sign it and you just want to back out now.
On the bright side though, it’s likely not very worthwhile to the property seller to try to enforce it. Their access to your deposit is limited since it serves as the collateral. If this is the case, the seller may just let bygones be bygones. You’ll be very lucky. So please, think hard about the property you want to purchase. Be absolutely sure this is the home you want. Because while you could get lucky, you could also ruffle the seller’s feathers so much that decide to pursue litigation against you. Someone powerful with lots of money backing them would have no trouble going after you. It’s much better if you avoid signing anything until you’re 100% sure this is the property you want to purchase without a shadow of a doubt.
How to keep your deposit safe
One of the best, not to mention easiest, ways to keep your deposit safe is to make use of the contingencies on the purchase agreement. This contingency is basically a clause which serves to protect you. It’s something that must be met or happen for the transaction to process and move full-steam ahead. Contingencies usually cover things such as the appraisal or inspections. But they can also be unique to your needs too.
Every contingency in the agreement must be met for this deal to go through. That means both buyer and seller must agree upon how these issues will be handled. If there is no agreement, both buyer and seller are free to walk away and any and all deposits are returned.
So, if you have a habit of changing your mind or you’re trying to master multiple properties, it might be a very beneficial thing to protect yourself with a contingency in the purchase agreement. Keep reading and I’ll tell you about different contingencies you can use to help protect yourself.
– Inspection contingencies
Inspections are so important before buying a property. Some things that are uncovered may be more than you’re willing to handle or invest in to repair. For example, if there’s a problem with the foundation or the electrical wiring is so out of whack, it would blow your budget to bring up to date, this is an important contingency. It’s always on a basic purchase agreement.
Once the inspections have been completed, you get an outline from the inspector (a third-party person) detailing any problems they’ve found. They’ll suggest remedies and in this event as the buyer, you are entitled to walk away from the sale if the amount of work proposed is more than what you expected. This is what protects many people when they fall in love with a property only to find they’ll wind up like Shelley Long and Tom Hanks in the old movie The Money Pit.
– Appraisal contingency
Unless you’re buying in cash, you’ll likely have to acquire a mortgage to make the purchase. The bank will require you to have an appraisal done to assess the fair market value of the home. If that appraisal comes in low, it means that the property is worth less than the sale price you and the seller have agreed on. The bank will then only pony-up financing for the lower amount. You can always make that up in cash but a better way is to negotiate with the seller. If they won’t bend on that price though, you can walk away with no obligations or consequences.
– Loan/mortgage contingency
For any sale that needs a mortgage, it also has a loan contingency. This is when the lender agrees to give you guaranteed financing by a determined date. If the lender can’t though, you’re allowed to walk away. For this to work, you must be fully denied for this financing. It won’t allow you to refuse the offered loan because of the interest rate or other details.
– Home sale contingency
For this contingency, the sale is dependent on whether you’ve found a buyer for the home you currently reside in. If you haven’t found one by the date you specify in the contract, you as the buyer and the seller can opt to put an end to this contract. However, be advised that the market is very competitive right now and this type of contingency is very rare. Your lawyer may strongly advise against it.
Walk away by using a “liquidated damages” clause
There’s one more thing you do to protect yourself. If you add a clause about liquidated damages, the only bad thing that can happen is that the seller can take your good-faith deposit. Remember, that’s anywhere from 1 to 10% of the purchase price. This might be the only way to walk away without a very expensive mistake. If you have a good relationship with the seller though, you might get lucky and simply have your deposit released. While not getting a deposit back would be disappointing, if all else fails and you’re basically on the hook, this is much better and much less costly than being sued.
This is why you shouldn’t sign your contract until you’re sure. It’s also why you should make sure you’re covered on the contract. But ultimately, you want to avoid backing out of buying a property. Keep reading and I’ll explain.
The importance of following your contract when backing out of buying a house
Let’s say you use one of those contingencies I mentioned. There’s still a chance, albeit a small one, that the seller can still keep your deposit if you didn’t meet the term outlined in the purchase agreement. In real estate, your purchase contract outlines all the things you both must do and agree to do to get the sale to proceed. If you don’t do what you said you would then you could be in breach of contract.
Say you missed important dates, didn’t have the inspection conducted, or neglected to submit the proper paperwork. By not taking care of what you’re supposed to, you’re not holding up your end of the deal. The seller then has the right to keep your money if this sale doesn’t go through.
If you don’t want to lose out on any money (and really, who does?) then you should be sure you’re paying attention to that contract long before you change your mind. Before you sign it, read it over. Ask your attorney any questions about it and allow both legal sides to make sure all details are correct and understood on the purchase agreement first. Then make sure you know exactly what you need to do and when you need to do it by. You don’t want to be left scrambling around trying to get everything done a day before the sale is supposed to go through.
Consequences of breach of contract
Now let’s say your contract is in order and the reports are too. The buyer or seller could still change their mind and decide against proceeding. Of course, the financial impact for backing out would be significant. If you’re the buyer and change your mind, you’ll likely be charged interest on the property’s purchase price. After a couple of weeks (usually two or three) the seller will then be allowed to withdraw from your contract and sell the property to another buyer.
You still won’t be off the hook though. You would be completely responsible for any differentiations in the sale prices and for the seller’s added costs and expenses. These could be anything from cancellation-of-removal costs to loan costs. Trust me when I say this is something you will desperately want to avoid getting into.
For sellers, the financial liability when they decide to withdraw from the offer is much less. If you’re a willing buyer and the seller backs out, the seller would need to pay you reasonable losses like accommodation costs if you’d already sold your property and needed to rent a space to stay in until the sale went through.
As complicated as all this is, backing out after you close is perhaps the most complicated of all. Read on to find out more about that!
How to Back Out of a Mortgage After Closing
Of all the things I’ve detailed above, the one you really want to avoid doing is backing out of a mortgage after you close. This becomes extremely complicated because the money is all tied up, with the small exception of refinanced mortgages. If that’s the case, the Truth in Lending Act allows you to decline that loan within the first three days after you sign at the closing, if this is for a primary residence.
Withdrawing from an accepted offer after the closing has been completed leaves you open to major retributions. The seller will most definitely pursue their legal rights to sue you for anything detailed in the contract. Buyers are seldom ordered to buy a property they don’t need or want though. The more likely scenario here is that you’ll have to pay big penalties to the seller for their loss of profits. These will include how you took the house off the market and tied it up for a while in a contract, preventing someone else from buying the property.
I have to tell you that you should NEVER do this. There are some reasons where it might be necessary though and you’ll have to get your attorney to help you with it. Documentation must be provided for pulling out based on clear reasons. If you simply said it was poor timing or something else that’s vague, that’s not going to hold up in a court of law.
The contract you made with the seller is the place you can find your answers though again, I recommend that you never back out of buying a property at this stage of the game unless one of the following things is true and can be proven with documentation:
- You suddenly lost your job and are unable to make ends meet
- Being unable to qualify for a mortgage (this would likely tie into you suddenly losing your job)
- You can’t sell your old property
- You’ve discovered major flaws with the property in question or that unpermitted work was done
- The boundary lines of the property were inaccurate
- There are undisclosed mechanic’s liens and easements on the property
Even with these, you’re going to need your attorney to help you through this. The bottom line is that it will all be very costly for you.
When you’re looking for a new home to move into or a new property to invest in, you should be absolutely certain this is what you want before you sign on that contract line. Go over everything listed with your attorney and be sure there are clauses in there that cover you fully should you find that the property has major problems that were uncovered in the inspection. The contract should aptly cover you in the event of something like this.
Ask yourself if you really want this property? If it’s going to be your home, do you love it? Is it convenient to where you need to be? And if it’s an investment property, ask yourself if you’re ready to handle the responsibilities that come with it? If you are and you feel confident in the contract, go ahead and sign. Just remember that a contract becomes binding only when the seller gets a copy of it that is signed by you and signs it too. Anything before that and you’re free and clear. Don’t let things get to the late stages and back out. It creates unpleasantness for everyone and will leave you with less money without gaining anything positive in return for your efforts.