Can you get out of a home purchase contract?
Not buying a house might seem like a straightforward proposition. After all, there's no law or moral imperative that anyone must purchase a home. However, suppose someone signed a contract, agreeing to buy a property for a certain price subject to certain terms, and then decided to back out. That would be a more complicated issue.
Contingencies offer outs
Prospective homebuyers who want to escape a purchase contract should turn first to the agreement itself. Most states require that real estate contracts be in writing to be enforceable, and most real estate contracts include contingencies, or conditions, that must be met for the deal to close.
Contingencies offers various ways to cancel a contract up until the minute when the contingency is either met or its associated time period expires. Which contingencies are included in a contract depends on state law, local custom and negotiation between the seller and buyer.
Examples of common contingencies include appraisal, home inspection, inability to get a mortgage and title, according to Jared Jacobson, an attorney in Philadelphia, Pa.
"If the property isn't appraised at the value that they agreed to, the bank isn't going to give the buyer the money to buy the property, so that's obviously a definite out," he explains.
Some contingencies are worded to fit a buyer's specific needs, according to Louis Cammarosano, general manager of HomeGain, a home sale website in Emeryville, Calif. For example, a purchase of a condominium in a college town might be contingent on the buyer's child being admitted to the local campus.
"You can enumerate (in the contract) specific outs as to why you will not go forward with the purchase," Cammarosano says.
Breach of contract
If the contingencies don't offer an out, another option is to breach the contract. Taking this step is a major decision because it could result in forfeiture of the buyer's earnest-money deposit or a lawsuit brought by the seller as well as accusations of bad faith and loss of any sums the buyer has spent on an appraisal, title report and home inspection.
Some buyers try to finesse a contingency to create a loophole that doesn't legitimately exist, so they can break out of a contract without a breach. An example would be pressuring the seller to make unnecessary or excessive repairs in a deliberate effort to kill the deal. This strategy is also an instance of bad faith.
Many real estate contracts contain a liquidated damages clause, which specifies how much the seller will get if the buyer breaches the contract, according to Joanne Fanizza, an attorney in Farmingdale, N.Y. The sum may be equal to the deposit or down payment, but could also be some other amount.
"If you breach and don't have an excuse that's permitted under the contract, then the seller retains your down payment as liquidated damages," she explains. "That's compensating the seller for any lost opportunity during the time that the (home was) off the market."
If the buyer breaches the contract, the seller may resort to a lawsuit for specific performance. Essentially, specific performance means a court will force someone to go through with whatever he or she promised to do.
"If you signed up to buy a house for $620,000, all conditions are met and you are just not going to buy it, the seller can say, 'No, you are going to buy it for $620,000' and get a court order for you to pay the $620,000. That's called specific performance," Cammarosano explains.
This type of lawsuit is rare, perhaps because sellers realize the buyer may not have $620,000, to use Cammarosano's example. But if the seller can't find another buyer and believes the one who breached the contract can complete the purchase, specific performance may be ordered.
Legalese aside, another option for buyers is to confess that they can't or don't want to purchase the house, perhaps due to buyer's remorse, job loss or other financial setback, Fanizza suggests.
"If you have an empathetic seller who learns that you've fallen on bad times, presumably they would work with you and let you out," she says. "It's more of a moral matter if you don't have a contingency in the contract that allows for that."
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Marcie Geffner is a freelance real estate reporter and writer whose news stories, features and columns have been published by dozens of newspapers, magazines and Web sites. She is a former managing editor of Inman News, senior editor of California Real Estate magazine and board member of the National Association of Real Estate Editors (NAREE).