Can You Get Out of a Real Estate Contract?

When I was in law school, there was a very popular phrase among the professors: “If you can get into a contract, you can get out of a contract.” Now, after nearly a decade of practicing law and selling real estate in the real world, I’ve learned that statement is mostly accurate, but with some important qualifiers. It’s true that if you can get into a real estate contract, you can usually get out of one, but not always, and almost never without some additional costs.

How does this work for residential real estate contracts—buying and selling houses?

The first step to buying a house is making an offer. Once the seller accepts the offer in writing (and it must be in writing), the property is officially under contract or pending. However, this does not mean that the buyer owns the house yet. Certain things must happen, and contingencies must be satisfied for the contract to be fully executed. In matrimonial terms, signing the contract is the engagement, and the closing is the wedding itself. The time between the signing of the contract and the closing is known as the escrow period. This is where exit options may present themselves.

Let’s look at things from the buyer’s perspective first.

A good contract will reserve the buyer the right to conduct certain inspections of the property. These may include a general home inspection as well as inspections for termites, radon, lead-based paint, and other hazards. Typically, these inspections must take place during a prescribed period, within two weeks of the original contract date, for example. If the inspections turn up something that is concerning to the buyer, the buyer and seller may negotiate some sort of repair, or the buyer has the right to walk from the contract. As a buyer, this may be the prime opportunity to get out without any additional costs.

Most contracts also require that the property to appraise for a prescribed amount (usually the purchase price). If the property fails to appraise adequately, the buyer has the right to renegotiate the purchase price with the seller or walk away if an agreement can’t be reached.

Even if all contingencies have been satisfied, the buyer may still have a method to break the contract, although it will likely come with some pain.

Most contracts require a certain amount of earnest money or a good faith deposit from the buyer. This money is held by the seller or in escrow on their behalf. If the buyer chooses to walk away from the contract without cause, the seller gets to keep it. It’s meant to keep the buyer earnest or in good faith—get it? Depending on the amount, forfeiting this money to break the contract may or may not be extremely painful.

In some circumstances, fraud may also allow the buyer options. If the seller has lied about some aspect of the property, the buyer can likely get out of the contract even after any inspection period has passed and all contingencies have been met. Of course, they’ll need to be able to prove it.

Next, let’s look at the seller’s options for getting out of a contract.

As a seller, your options for getting out are far more limited than for buyers. This is due to a legal doctrine called specific performance. Simply put, it means that in most cases courts will require a seller to perform the contract. The reasoning is that a seller can theoretically find another buyer, but a buyer cannot find another house exactly like the one they’ve contracted for.

Legally, once a contract is signed the seller is largely at the buyer’s mercy. However, if the buyer does not fulfill all the necessary aspects of the contract, the seller may have options. If the buyer does not secure financing within the timeframe prescribed by the contract, for example, the seller may be able to cancel the contract at that point, as the buyer is in breach.

Beyond this, sellers’ legal options are extremely limited. One final available Hail Mary is simply to respectfully ask the buyer to be released from the contract. A contract is, after all, simply an agreement between people. It can be changed if all parties agree.

In the end, the best advice is to make certain you fully understand what you are getting into before you sign a contract. Understand all the provisions and contingencies that need to be satisfied, what your options are for getting out, and what penalties you will pay if you break the contract. For help understanding all of this, make sure you are working with a competent professional.

*Image used with permission. *