Can Seller Back Out of Contract During Option Period?
Sellers’ Options During the Option Period
Purchase agreements (signed by the buyer and the seller) are legally binding contracts, so there are very few options available to sellers who want to back out of the contract. Parties are only released from these contracts when the sale is complete, a party uses an exit clause to terminate the contract, or when both parties agree to modify or cancel the contract. There are a few valid reasons that sellers can terminate their real estate contracts, but we’ll begin by clarifying situations in which sellers can’t legally terminate the contract.
Illegal Reasons to Terminate the Contract
Once the contract has been signed, a seller is obligated to uphold their end of it. This means that a seller can’t get cold feet and legally back out of the contract for the reason of sentimentality (or acquiring a better offer as a backup). In fact, the Specific Performance provision in real estate law dictates that the contract is valid and binding and that both parties are mutually obligated to adhere to the contract. Sellers who breach the contract are in danger of being taken to court, and will likely be required to convey the property to the buyer anyway. Sometimes sellers must provide a reduction in the purchase price in addition to carrying out the contract. They may file a “notice of pendency to prevent any transfer of the real property. This type of notice prevents the property from being sold to someone else while the lawsuit is ongoing.”
James Meador, a realtor from Pasadena, Texas, explained, “The option period is a protection for the buyer only, and only the buyer can “opt-out” of the contract during the option period. If the buyer decides to continue with the purchase, so must the seller.”
Legal Reasons to Terminate the Contract
There are, however, some legal reasons for sellers to terminate the contract. These include contingencies stated within the contract, if the buyer violates specific terms of the contract, or if the seller can prove the buyer committed fraud. Beyond these, there is one other option: persuading the buyer to cancel the contract.
Darby Grimmett of Keller Williams Realty said, “With a contingency contract, the seller can give notice to the buyer that another offer has been received or considered. At this time the buyer has the option to waive the contingency, deposit additional earnest monies with the title company, or terminate their contract.” The contingency clause that Darby referred to here is the “Kick-Out Clause”. This contingency states that the seller can continue to market the property. If the buyer does not respond to the contingency in time, the seller can back out of the contract and sell to a new buyer. If you’re concerned about contingencies falling through, though, there’s nothing to worry about there. The National Association of Realtors conducted a survey in January 2020 revealing that 76% of sales had contract contingencies, but only 9% of those offers fell through.
The seller can also place a contingency within the contract that states they can back out without a penalty to find a new place to live first. This is often referred to as the “home of choice” clause. For buyers, this means “You’re stuck waiting and hoping that the seller finds something in those 45 days,” real estate agent Eldad Moraru said (in 2013). “Sellers can place demands they couldn’t, a year or two ago.” Of course, the landscape of real estate is always changing, and it’s not uncommon today for a seller to successfully make a sale on their house sight unseen.
Another contingency is that of an attorney review period, which is usually a 3-5 day window in which attorneys can review a contract before it’s binding. During this review period, either party can request modifications or void the agreement. This contingency is mandatory in New Jersey but must be stipulated in advance in other states. “People believe that once you sign a real estate contract, everything in the contract is final. That is not true… the fact of the matter is, once you sign, an attorney has five business days for a ‘review period’ and to propose modifications,” said Lauren Jackson, a real estate attorney located in Illinois.
Buyer Violates Terms of the Contract
If the buyer fails to secure the mortgage in a certain time frame, sellers can move on rather than waiting for the buyers to find financing elsewhere. The buyer may also violate the contract by missing the deadline to make the escrow deposit or failing to inform the seller or lender about changes to their finances that can prevent them from securing their loan. Before the seller can back out of the contract, however, the seller must give formal notice to the buyer that they’re in breach of the contract, and wait several days to see if the buyer complies. Sellers can’t back out because the buyer has violated the contract for a little while – the seller has to go through the proper legal process before they can back out.
The Seller can Prove the Buyer Committed Fraud
It’s very rare, but if the seller can prove the buyer defrauded them, a court may void the real estate contract. Just as it’s illegal for sellers to lie about a house’s condition, buyers can’t use fraudulent practices to trick a person into signing a purchase agreement. An example of this: criminals pretending to be real estate investors preying on elderly homeowners and tricking them to sell their homes for a fraction of fair market value. That’s just one of many real estate scams that unsuspecting sellers have succumbed to.
Persuading the Buyer to Cancel the Contract
The seller can never force the buyer into canceling the contract, but the buyer may choose to back out of the contract using one of their contingencies. Another way to persuade the buyer to cancel, albeit less common, is for the seller to talk to the buyer. Some buyers are sympathetic and may decide to dissolve the contract with the seller.
Convince the Buyer to Walk Away After an Inspection
If the buyer’s home inspection reveals problems, the buyer may choose to exercise a contingency and walk away from the contract. Alternatively, the buyer may be willing to work with the seller if the seller makes repairs. If the seller refuses to negotiate, the buyer may try to use the findings to renegotiate the purchase agreement. Sellers are not obligated to lower it, however. At that point, the buyer can either purchase the home for the full asking price or back out of the contract.
Of course, if the home is in great condition or the buyer is very motivated to purchase the house, the buyer may proceed with the sale anyway.
Refuse to Modify the Contract After a Low Appraisal
If the home appraises for less than the agreed-upon sale price, the buyer can walk away. Alternatively, the buyer may be willing to work with the seller and try to negotiate a new sales price or ask for time to find a new lender. The seller is not obligated to make any of these concessions.
The buyer may also bring extra cash to closing in order to make up the difference between the purchase prices and the loan amount. If the buyer does this (or convinces the lender that the appraisal report is inaccurate), the seller’s hands are tied.
Sellers shouldn’t count on having a low appraisal, though – the Federal Reserve Bank said that fewer than 10% of appraisals are below the purchase price.
Get the Buyer to Cancel the Contract
The last option for sellers is to get the buyer to cancel the contract. This isn’t going to be easy – the buyer is likely already attached to the home. Also, if they’ve already sold their house, backing out of the deal may leave them without housing. To overcome this, the best bet for sellers is to offer the buyer a lot of cash. This cash will be used by the buyer to pay for temporary housing. (The buyer may also use it for anything else they may need as they continue their house search.)
Another thing the seller could try is to make an emotional appeal. Sellers could want to back out for any number of reasons, including a death in the family, divorce, or losing their job. A more empathetic buyer may choose to release them from the contract in those circumstances.
Options for Agents
So what do you do if you’re a real estate agent whose client suddenly got cold feet? If the buyer has grounds for a lawsuit, you will likely have grounds as well. Brokers may take the seller to court to compel them to pay for the commission they would have received on the sale if it’d gone through. Listing agreements, such as the one the seller signed with your brokerage, usually state that the sellers owe the realtor a commission if the property attracts a “willing and able” buyer. This means that if the buyer has fulfilled their contractual obligations up until the seller breached the purchase agreement, a court can order the seller to pay you commission (5-6% of the sale price you negotiated with the buyer).
A Stress-Free Closing Process
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