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How to Back Out of a Real Estate Deal

[Updated: Jul 15, 2020] Dec 21, 2019 by Matt Frankel, CFP
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Most real estate purchase contracts have a time window of 30 to 60 days to close on the sale. That’s a lot of time, and there’s a great deal that can change or go wrong during that period. In short, no matter how excited you are to sign a purchase contract, the reality is that there are many potential reasons why you might want out of a real estate deal afterward.

With that in mind, here’s an overview of what you need to know if you want out of a real estate deal after you’ve already signed on the dotted line.

Inspection contingencies

The first major contingency you can use to get out of a real estate contract is the inspection contingency. Even if you agree to purchase the property on an as-is basis, you’ll still generally have anywhere from 3 to 10 days to have the property inspected so you'll know exactly what you’re getting into.

Generally speaking, serious buyers don’t immediately back out of a deal simply because they find something they don’t like on an inspection report. There’s always the option to ask the seller to make repairs or give a credit to cover their cost, and some sort of seller concession after the inspection is quite common. That said, it’s important to know that the inspection contingency does give buyers a way out if they want it.

Financing contingencies

The second (and longer-lasting) of the two major contingencies has to do with financing. If you initially plan to obtain a mortgage to buy the property, the contract will typically state that the sale is contingent on the buyer’s ability to qualify for financing. If the buyer doesn’t qualify for a loan, the financing contingency provides a way out.

The financing contingency also covers several other common issues. For example, the property appraising for less than the purchase price is a common reason for mortgage rejection. The same can be said if the property runs into insurance issues (say it’s unexpectedly in a flood zone) or if a title issue is uncovered during the closing period. (Note: If you’re paying cash for a property, it’s not a bad idea to have a separate appraisal, insurability, and title contingency written into the contract.)

It’s also worth noting that there’s typically a time limit on the financing contingency – often around five business days before the scheduled closing date.

Other ways you may be able to back out

In addition to the inspection and financing contingencies, there are a few other ways you can potentially back out of a real estate deal:

  • Missing signatures: A real estate contract isn’t final until all parties have signed the finalized version. If it’s early in the deal and not everyone involved has signed, you may still have an easy way out.
  • HOA grace period: If the property is located in an HOA or condo association, the seller must provide you with all relevant documents, such as the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). Once it’s delivered, you typically have a few days to review them -- and you can choose to walk away if you don’t like what you see.
  • Selling of current home: Another common contingency has to do with the sale of your current home. This contingency is typically included in the purchase contract, if applicable. But even if it’s not, the failure to sell your current home can make it difficult or impossible to get a new mortgage, which can trigger the financing contingency.

What if you just want out?

What if you don’t have any contingencies you can use, and there are no other contractual ways you can back out of a real estate purchase agreement? Does that mean you have to close on the property?

Take a deep breath. To be perfectly clear, you can always back out of a real estate purchase contract at any time before closing. There’s no way the seller can force you to actually purchase the home. However, if there’s no valid reason for backing out as defined in the contract, you’ll likely lose your earnest deposit. I’ve bought a total of six properties in my life, and my earnest deposits have ranged from $500 to $10,000, so this can be a lot or a little, depending on the situation.

Know what your time period to closing is, and be aware of the contingencies that may apply to you. Even if you aren't planning on backing out, it's always a good idea to know where the exits are.

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