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Regardless of which side of the table you’re on, it’s never a good idea to back out of a deal once it’s already in motion. For the buyer, they have the ability to back out at several stages under the right circumstances. They can withdraw an offer if the seller hasn’t accepted it within a timely manner. They can incorporate a variety of “possible outs” in the form of contingencies into the contract.
However, if they want to back out simply because they have cold feet or they find a better home after already signing a purchase agreement, they could face a lawsuit on top of losing their earnest money deposit. For most people, losing 1% to 10% of the property’s purchase price isn’t an easy pill to swallow.
Regardless of the why, seeking legal action if a buyer backs out is an option, but it can be a lengthy and very expensive process that may not even result in your favor. If a buyer backs out on your deal, you’ll want to weigh your options and consult a real estate attorney before making any decisions. While you can sue a buyer for backing out, sometimes it’s easier to take their deposit, re-list, and include some contingencies of your own with the next buyer.
“What are the legal options and can the seller sue after a buyer pulls out of a real estate deal?” That’s probably one of the most common thoughts someone has when a deal falls through, all because the buyer changed their mind. Unfortunately, deals falling through are becoming more common than they used to be. Redfin revealed that in August, close to 60,000 real estate deals fell through after going under contract.
What’s the culprit?
Rising home prices and interest rates, of course.
In three short years, the median home price in the country went from $329,000 in 2020, up to $416,100 in 2023. That’s a 26% increase! On top of that, interest rates on a 30-year fixed-rate mortgage went from 2.90% up to 7.19%. That’s a huge leap and people are, understandably, hesitant about moving forward with a huge purchase like buying a house.
Credit: Freddie Mac
That being said, most of the people who are putting their homes on the market now aren’t doing so because they want to… They’re doing it because they have to. No one wants to sell a home they got when rates were low just to buy a house that’s going to be undoubtedly more expensive. So, when sellers get an offer on their home and it goes under contract, it’s understandable that they’d be upset when buyers back out.
In this article, we’ll cover the different points of the real estate deal when a buyer can back out without legal repercussions, what sellers can do when a deal falls through, and more.
A seller can sue a buyer for backing out of a real estate deal, but it’s not something that’s done on a whim. In a real estate contract, there are a few contingencies that can protect the buyer, thus allowing them a way out without facing legal repercussions.
Under usual circumstances, buyers will almost always include some kind of contingency in their offer. It’s true that a seller can reject any offers that include contingencies, but you only really ever see that when it’s a strong sellers market and are likely to receive multiple offers.
Buyers almost always include the following contingencies:
Some of the legitimate reasons a buyer may back out of a deal can include:
A seller can sue a buyer for backing out if they believe the buyer is in breech of contract. An example of a buyer being in breech of contract a buyer failing to reach out to the seller to negotiate the terms of the deal after a home inspection within the specified timeframe (usually one week after the inspection is completed).
The seller can file something called a “suit for specific performance.” In this, the seller could petition the court to order the buyer to make good on their end of the contract.
In order for the suit for specific performance to be carried out, a few things must be taken into consideration. These include:
Keep in mind that not all states permit this type of legal remedy. In most cases, purchase agreements state that if the buyer backs out, the seller can keep the earnest money deposit and that’s all.
Another instance where a seller can sue would be when a buyer completes the contingencies as outlined in the contract (which both parties have signed), but they suddenly decide they don’t want to buy your house and purchase another house instead.
The seller can keep the deposit and even sue for damages because if all the contingencies were met, there should be no reason for the buyer not to move forward.
In the event that the buyer wants (or needs) to back out of the deal after it’s move to the escrow phase, the buyer will find it more difficult to do so without serious repercussions. After all, the deal is just days from closing!
If all the conditions of the contract have been met and all the contingencies have expired, the buyer could lose their earnest money deposit to cover any damages the seller has incurred and even face a lawsuit. This is where the seller could file a suit for special performance.
Entering a lawsuit may not be the best option in every situation; property that’s embroiled in a lawsuit cannot be sold until the suit has been settled. In most cases, a seller will keep the buyer’s deposit, cut their losses, and re-list their property.
In the event that a seller finds a new buyer, but it sells at a lower price, the seller could sue the buyer for the difference in price. So, not only would the buyer lose their earnest money, they may have to pay the seller thousands (if not hundreds of thousands!) of dollars due to the property losing value after they backed out. On top of all of that, a seller could sue for legal fees and mortgage carrying costs.
Although the primary focus of this article was what happens if a buyer backs out, it’s not unheard of for sellers to back out of a deal. Usually they’ll back out of the deal when a contingency hasn’t been fulfilled. There are a few contingencies a seller will work into the contract to give them a way out without facing consequences. These contingencies include:
Sellers can also back out of a contract if:
If a seller backs out of the deal, the buyer can seek the counsel of a real estate attorney and they have the option to sue the seller for breech of contract. Seeking legal action is expensive and time-consuming for both parties and doesn’t always turn out favorably.
Fortunately, if the seller backs out, the buyer can get their earnest money back… No questions asked. Sellers may also have to pay the real estate agent some form of compensation for wasting their time. It all depends on the terms written in the contract.
*Nothing on our website, including this post, should be considered legal advice. This post is for general information only. As always, we recommend consulting a real estate attorney regarding any potential real estate investing legal matters.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
