How home buyers can get out of purchase agreements

A contract is only as good as the people signing it! - Jeffrey Fry.

Home buyers can, and often do, change their minds about a home after their offer is accepted. It can be a simple case of getting cold feet or discovering some issues with the home while doing their due diligence. And now they want to get out of the purchase agreement.

There are a number of ways a buyer can get out of a contract to purchase a home. Buyers can walk based on contingencies that are part of the real estate contract such as a failed property inspection or an HOA review. However, when there are no contract clauses that the buyer can leverage, then walking on the sale and forfeiting their earnest money is the last resort, but financially, the most painful option.

The more contingencies a buyer has in their accepted offer the more exit strategies they will have. Conversely, in multiple offer situations where the buyer has to waive many of the usual protective contingencies in order to win the home, they will have few, if any, ways of wiggling out of the contract 

For home buyers, this article will provide information on how they might be able to get out of a contract.  For home sellers, it will help them look at offers differently and help them select the best one in multiple offer situations. After all, the highest offer is not always the best offer. 

First off, what is a real estate contract to buy a home?

An agreement to purchase a home is a signed contract between the buyer and the seller that contains specific contingencies, aka clauses, detailing the conditions under which the home will be purchased. These contingencies include (ideally), the buyer's right to inspect the property to their personal satisfaction and buying the home only if they can get approved for a mortgage and pass an appraisal. 

A purchase contract will the full complement of common contingencies provide the home buyer will maximum protection and the most ways of breaking the contract. 

A note regarding earnest money: part of the home buying process requires that when a buyer has an offer accepted on a home they deposit a predetermined amount of cash to the closing agent/escrow company within a few days after mutual acceptance.

This money is considered a good faith deposit by the purchaser and they are serious about buying the home. It also means that they are willing to forfeit that money in the event that they break the contract when they do not have the right to do so.  If the sale proceeds all the way to closing, the earnest money deposit will go toward the downpayment and closing costs. 

How buyers can cancel a purchase agreement using sale contingencies.

Contingencies are home buyers' best friends. From the buyer's perspective, the more the merrier. Some contingencies give the buyer an automatic out while others allow the buyer to get out of the agreement if they cannot reach an agreement with the seller.

Breaking the contract based on the inspection contingency.

The inspection addendum gives the buyer the right to inspect the home and property after mutual acceptance.

As part of the home purchase process, the buyer has a set amount of time to complete the inspection and respond to the owner. If for any reason whatsoever, including just getting cold feet, the buyer changes their mind and doesn't want to buy the home anymore, they are completely within their rights, to end the contract, walk and get their earnest money back. 

Frustratingly for the seller, the buyers are NOT required to provide a reason as to why they are walking on the sale. For the Seattle area at least, the inspection addendum states the following: This agreement is conditioned on  BUYER'S SUBJECTIVE SATISFACTION with inspections of the property...

It's the main reason why sellers love offers that do not have an inspection clause.

Also, if the buyer asks for a price drop or repairs but the sellers are not willing to negotiate, then the buyer can break the agreement.

Important: Make sure you pay close attention to the dates specified in the contract. The buyer's ability to walk based on the inspection contingency or other contingencies has a set period of time as detailed in the offer. If the buyer does not respond to the sellers within that contingency period, then the buyer forfeits their right to break the contract using that particular contingency.

Getting out of a purchase agreement due to a failed appraisal or financing contingency.

If the buyer is relying on getting approved for a mortgage to purchase the home, then the lender will require an appraisal of the market value of the property. If the appraised value is below the agreed-to purchase price and the seller refuses to drop the sales price to the appraised value, then the buyer can walk on the sale and get their earnest money back.

Also, if for some reason the buyer fails to get approved for a home loan by the lender then they can get out of the contract and keep their earnest money. However, these days, getting pre-approved for a loan has strict guidelines and the vast majority of buyers who are pre-approved will also get approved for a mortgage once they find a home (assuming it passes appraisal).

Losing their job would prevent a buyer from getting approved. Likewise, doing something dumb like buying a new car between mutual and closing and dinging their credit score could result in the buyer being denied a loan.

Note that in this case, a buyer who is desperately seeking a way to get out of the contract will be hoping that the appraisal fails. The financing contingency and appraisal contingency are not something they have actual control over, unlike the inspection contingency.

The HOA contingency exit strategy.

If the home is overseen by a Home Owners Association (HOA) then the buyer's contract will have an HOA review clause. The buyer will be given a copy of the Resale Certificate to review which contains all the HOA's rules and regulations, CC&Rs, financial statements, meeting minutes, a copy of the latest Reserve Study, and other information. 

If the buyer sees something that they don't like, for example, an upcoming special assessment for $20,000, then the buyer is within their rights to walk on contract. Just like the inspection contingency, the buyer does not have to provide a reason for walking on the purchase.

The inspection addendum and the HOA review contingency are the Get Out of Jail Free cards of the home purchase process. Feared by sellers, loved by buyers!

Backing out of the sale based on the Title contingency.

Real estate contracts are usually contingent on the buyer reviewing the Title Report for the home. This report is compiled by the Title Company... the one you pay a chunk of money to for title insurance as part of your closing costs.

The buyer has to be provided with a marketable title at closing. In other words, a clean title that is free of liens and any other red flags that might limit the buyer's use of that property.

If the report does contain title issues like unpaid taxes or liens, then the seller has the right to pay those off at closing. The buyer does not have the right to walk on the sale before closing.

However, if for example, the title search discovers that that city will be taking the front 10 feet of the front yard for a road-widening project or discovers that the fence is encroaching 5 feet onto the neighbor's property, then the buyer has the right to pull their offer and go find another home. 

Getting out of a purchase agreement with NO contingencies.

If the buyer is desperate to get out of the real estate transaction and all the contingency times have expired or they had very few, if any of the common contingencies in the first place, then there is really only one option. Walking on the sale and being willing to lose their earnest money.

The earnest money now becomes liquidated damages to compensate the seller for taking their home off the market and potentially missing out on better offers. The seller now has to go back on the market and potential buyers will be questioning what happened and whether the home has some "issues". 

In Washington State at least, the most earnest money a seller can keep as liquidated damages is 5% of the sale price, even if the buyer had deposited 10% earnest money. Sellers will push for the buyer to deposit as much earnest money as possible so that the buyer will think twice about walking on the sale right before closing.

This exit path can be very expensive, particularly for buyers who scrimped and saved for a downpayment and can barely qualify for a home loan. 

The best advice regarding how to get out of a real estate purchase contract.

If you are unsure about making an offer in the first place, then step back and don't make an offer. Buyers always feel a mixture of excitement and anxiety when making an offer on a home but if it's 90% anxiety and only a little excitement, it's likely you will be looking to get out of the purchase if your offer gets accepted.

Prevent buyer's remorse by just moving on and looking for a better match for your needs. If your Realtor is any good and they have your best interests at heart, they should steer you in the right direction. There will always be more homes around the corner.

It's good to put yourself in the seller's shoes and be considerate of their situation. They are trying to sell their home and trying to ensure they get a good offer that will go all the way to closing so that they can get on with the next phase of their life.

If you are in love with the home, then absolutely, make an offer but include as many buyer contingencies as you can to protect against potential issues that you are not unaware of at the time of submitting the offer. Or, if possible, do as much due diligence as possible BEFORE submitting an offer like doing a  pre-inspection of the home if waiving the inspection clause.

And if you are having to compete with multiple other offers for the home, then know your limits and be really careful as to which contingencies you are willing to omit from your offer. The last thing you want to do is to have to walk with no contingencies and forfeit your earnest money because the home is a complete and utter lemon.