Selling and buying a house at the same time can be a life-changing experience. In many cases, the seller is delighted to complete the sale, and the purchaser can’t wait to move into their new abode. But as with all things in life, it’s not impossible for someone to change their mind or have second thoughts. So, how can a home seller back out of a contract—and what happens when they do?
Most of the protections against ending up with an unwanted real estate contract are on the buyer’s behalf. The assumption is that the seller is committed to the process and delighted to finalize the sale—but that’s not always true.
Whether you’ve decided your current home is where the heart is or want to look for a better offer, there are limited opportunities during a real estate transaction that allow sellers to cancel it. Likewise, if you’re the potential buyer of a home, it can help to know what avenues are available to sellers who want to back out.
Below we’ll answer these questions and provide suggestions for protecting your legal interests before signing a purchase agreement.
When Is the Seller Legally Committed to the Home Sale?
With most home sales, the core contract is called a Residential Purchase Agreement (RPA).1 The RPA is a multi-purpose document that is used from the initial buyer’s offer through to the final sale, and may contain several addendums and options.
When the seller receives an RPA with an offer on their home for sale, they can:
- Accept the offer as written
- Return a counter-offer for the buyer to consider
- Reject the offer
But after signing an RPA, you might wonder—can a seller back out of a contract before closing? Here, it becomes a little complicated.
Once signed by both parties, an RPA is a legally binding sales contract. It can only be canceled in one of three circumstances:
- The transaction is complete and the house sale has gone through
- Either the buyer or the seller activates an exit or contingency clause within the RPA
- Both buyer and seller agree to modify or cancel the contract and do so in writing
How Can the Seller Back Out After Signing the Contract?
There are three ways to back out of the sale agreement legally after signing an RPA. In order of commonality and usefulness, these include:2
- Taking advantage of an exit or contingency clause built into the contract
- Proving the buyer has failed to perform
- Convincing the buyer to cancel the contract
Because these three options can be complex, we’ll take a closer look at them below.
Exit Clause Contingencies for the Seller
Let’s put it in reverse a bit here and back up to the negotiation stage—after a buyer submits an offer, but before the seller has signed the contract. While the RPA is a standard legal document and cannot be significantly modified in its core language, it contains several choices throughout as well as the opportunity to add addendums.1
A seller’s best protection from a contract is to use the offer/counter-offer period to establish escape clause contingencies within the RPA. The seller can specify:
- Contingency on the seller entering a contract to buy a replacement property
- Right to occupancy for a maximum period after the sale
- Limits or refusals of buyer-added contingencies
Sellers and buyers can also negotiate any listed amount of time or money. Although the RPA contains a default set of time frames for each step of the process and assignment of who pays how much in commission to the real estate agent and listing agent, all of these items are negotiable, which is why the timeline for selling a house can vary greatly.
Once these exit clauses (and any caps on buyer exit clauses) are built into the RPA, they become the legal “loopholes,” allowing the seller to back out of the contract. These may include:2
- Home of choice – In this case, the sale is contingent on the seller entering a contract to buy a replacement property by a certain date. This can be a sticking point for buyers. They’ll have to accept that the seller will make every effort to find a new house, plus the risk that they can’t find or finance what they want. But if you add home of choice to your RPA as a seller, you can legally back out of the home sale so long as you haven’t signed a contract on another home.
- Attorney review – This essentially allows you a delay, often three to five days, to have an attorney provide legal advice and approve the contract after you sign it. During that period, both the seller and buyer can back out of the contract for any reason.
- Kick-out clause – This rarely used option allows sellers to continue marketing their home after signing an RPA with buyer contingencies. If they receive a higher offer before the buyer has fulfilled their contingencies, the seller can back out of the RPA to accept the higher offer.
Buyer Failure to Perform
A seller can also back out of a contract if the buyer fails to meet the terms of the contract.3 Since the steps and deadlines for fulfilling the sale are defined in the RPA, this is an overall “exit clause” you can choose to activate only if the buyer misses deadlines or other requirements.
The buyer might fail to:
- Deliver their deposit of earnest money in full to escrow
- Provide proof of financing or funds
- Submit a Contingency Removal Form on time
If any of these events occur, the sellers can opt to provide a Notice to Perform to the buyer, who then has 48 hours to remedy the situation.4 If they fail to do so, the seller can deliver Escrow Cancellation Instructions to the buyer.
The seller may be able to keep some or all of the earnest money in addition to canceling the contract. While this contract dissolution is based on the buyer missing deadlines, it’s the seller’s choice to actively move to cancel the contract, rather than sending a kind inquiry to a buyer in a favorable sale.
Convincing the Buyer to Cancel the Contract
Sellers with contract remorse can actively or passively attempt to convince the buyer to walk away in a few different ways. These include:
Refusal of Buyer Concessions
Once the buyer’s inspection and appraisal are completed, they’ll usually submit a list of requests to the seller. If the seller refuses them, the buyer has the option to back out of the sale.5 This can act as:
- Effective cancellation based on financing – If the RPA includes a contingency for the buyer’s loan to come through, they may request a reduction in sale price after their appraisal. If the seller refuses to reduce the purchase price, this may require the buyer to walk away. That’s because lenders may not approve home loans where the sale price is over the appraised value.
- Discouragement – In a competitive market, a buyer may have submitted a high offer with the plan to recoup some of that cost through seller concessions. After having the home appraised and inspected, the buyer may submit a request for credits for repair needs, closing cost assistance, or changes to the property.
A seller can refuse any and all concession requests. This is a contractual opportunity for the buyer to cancel the sale—not the seller—but refusing concessions can act as discouragement that may end with the buyer walking away.
Offer of Compensation
Once they have a signed contract in hand, a buyer may be emotionally invested, relieved of finally having found their new home, and out-of-pocket from the deposit, home inspection, and appraisal costs.
In some circumstances, a buyer who cancels the contract may lose some or all of the earnest money sitting in escrow. If they walk away, they’re re-starting the home purchase process, possibly losing the lock on their mortgage rate, and out all of the time they’ve spent on this home. This total investment can outweigh the cost of refused seller concessions.
If a seller wants out of their contract at the buyer’s discretion, presenting them with a cash offer may be the way to go—but it may need to be a significant amount.
When all else fails, a seller can just ask for what they want directly. So long as they haven’t established a bitter relationship with the buyer, the seller can approach them with a request at a shared-humanity, appeal-for-kindness level. This might be attempted after:
- A death in the family
- Major medical concern or other family hardship
- A job loss or change that has damaged the seller’s ability to complete the sale
Even without a dire loss or plight, if the seller has acted in good faith but has reason to regret the contract, it’s worth attempting. Still, they may need to combine it with compensation for their time and costs.
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- Rocket Mortgage. What Is A Real Estate Purchase Agreement And Why Is It Important? https://www.rocketmortgage.com/learn/real-estate-purchase-agreement
- Investopedia. Contingency Clauses in Home Purchase Contracts. https://www.investopedia.com/articles/personal-finance/102913/contingency-clauses-home-purchase-contracts.asp
- Time. How to Protect Yourself If You Need to Back Out of a Home Purchase. https://time.com/nextadvisor/mortgages/back-out-of-home-buying-contract/
- Home Bay. What is a Notice to Perform & When Should You Use It? https://homebay.com/resources/notice-to-perform/
- Investopedia. Why Housing Deals Fall Through. https://www.investopedia.com/articles/mortgage-real-estate/09/house-contract-falling-through.asp
- California Association of REALTORS®. Your Guide to the California Residential Purchase Agreement. https://images.kw.com/docs/3/1/9/319871/1329755697058_residential_purchase_agreement_guide.pdf