Reasons Why a Buyer Can Back out of a Purchase Agreement and Its Potential Consequences
July 20, 2017There are many reasons why a buyer might decide to back out of purchasing a house, even after an agreement has been signed. It might be due to unexpected circumstances or because the purchase agreement contingencies were not met in a timely manner.
Whatever the reason, depending on the contract that the buyer has signed (if any), there might be consequences that could affect both the seller's and the buyer's finances.
If a purchase offer has not been accepted and signed by the seller, the buyer can easily withdraw it without any other consequence except the time spent shopping and putting together an offer.
This means you can both reject the seller's counter offer, or tell the seller's agent that the offer is off the table, even after you've sent them the contract, as long as the seller hasn't signed it yet.
Here are some common reasons buyers decide to back out from a purchase agreement. These can be related to the buyer's personal circumstances or to the property's circumstances.
Buyer's personal circumstances
- Job loss
If a person is suddenly out of work, it makes sense that they'd want to back out of acquiring a debt that they are not 100% sure they'd be able to pay in the future—even if it involves paying a penalty fee, or forfeiting their earnest money. After all, how could one knowingly commit to paying a mortgage without a steady income?
- Inability to qualify for a mortgage
There are several reasons why a buyer may not qualify to get a loan. Even If they have been pre-approved for a mortgage, there are no guarantees that the definite approval will be given by the lender.
There are several reasons a lending institution may choose not to grant a mortgage, among these, we can mention changes in the credit history or employment situation of the applicant, perhaps the lender doesn't agree with the home's appraisal, or the house didn't pass the inspection according to the lender's standards.
If the buyer's agent included a financing contingency clause in the agreement, the buyer should be able to walk away from the deal without any losses, provided that it is done before the contingencies' expiration date.
- The buyer's failure to sell their old home
This should also be included in the contingency clauses if the buyer is dependent on selling their old property in order to be able to buy a new one. As with all contingency clauses, if notice is given before the expiration date, the buyer should be able to back out without any major losses. However, this clause usually allows the seller to keep their home on the market, so if they receive a better offer, they too can opt out of the agreement.
- A failed inspection
By law, the seller is required to disclose any known property damages or flaws that could potentially affect the future value of said property. If a buyer discovers upon inspection that the seller refrained from disclosing major structural damage or pest infestation, they can withdraw the offer. Additionally, a lender can deny the buyer financing if the inspection does not meet their requirements.
- The improvement or repair terms were not met by the seller
In this case, the buyer got the inspection results and the seller agreed to perform repairs or improvements. However, when the contingency date arrived, the seller didn't comply with the agreed repairs.
- Undisclosed easements
An easement is the right of another person or entity to use part of a property. Easements can be beneficial or detrimental to a property. For example, any utility easement placed on your property that serves the property itself and the neighbors', can be considered a beneficial easement. On the other hand, a prescriptive easement that was created without the owner's knowledge —such as a neighbor using a part of unused land to grow crops—can be considered detrimental.
There are 3 types of easements. Two of them are usually fully disclosed when the property is sold. However, the other type of easement can arise without the knowledge or consent or the property owner.
- Clouds on a home's title
A cloud on a title can be in the form of an unreleased lien, a deed, a claim, or any other encumbrance that might affect or negate real property ownership in the near or distant future. These usually arise during the title search, and should be resolved before closing the deal. If any clouds on the title of the property remain unresolved, the buyer is entitled to withdrawing their offer.
Check out our previous blog post where we explained what title liens are and how they affect property ownership.
Potential consequences of backing out of a purchase agreement Depending on why and when a buyer decides to rescind the contract, there can be no consequences at all or, in the worst-case scenario, the buyer can be sued for not complying with the agreement.
If the buyer exercises their right to withdraw the offer due to the seller's failure to meet the specifications in the contingency clauses, and it does so within the established period of time, they are under no obligation of forfeiting their earnest money and can walk away from the signed contract without any consequences.
If all the contingencies are met within the established time, and there are no valid reasons for the buyer to back out of the deal, they could lose their earnest money deposited in the escrow account—typically 1 – 3 % of the property's price. This is known as liquidated damages and it compensates the seller for the time the property was off the market.
If the seller feels disgruntled, they might even attempt to sue the buyer for specific performance. Specific performance is a type of remedy often sought out in real estate transactions. If either party involved in the transaction fails to follow through the clauses in the contract for reasons that are not contemplated within said contract, the affected party can get certain reprises.
This type of remedy requires a court to rule against the party breaching the contract and fulfill the contract as if it had never been breached. In the case of a real estate deal, it would mean buying or selling the house. Even though this is possible, it is highly unlikely that a person is forced to buy or sell a house that they don't want to.
It is important to understand that not only the buyer can decide to withdraw the offer, the seller too can change their mind and decide not to sell the property. In either case, if there is a breach in the purchase agreement contract, legal and financial repercussions might take place.
Unexpected circumstances can arise for either party that prevent them from following through. That is why it is important to work with knowledgeable and experienced real estate professionals, from the agent to the title company to the attorney, if you choose to work with one. They will ensure that all the terms of the contract contemplate any contingency that might affect the transaction.
If you have made an offer or signed a purchase agreement, but have decided not to go through with it, it is crucial to notify your decision as soon as possible, for both yours and the seller's sake. It is better to leave all the negotiations to your agent or real estate attorney.
Key Title & Escrow is a premier Florida title company working with buyers, sellers, and realtors. Give us a call at (305) 235-4571 or fill out the contact form. One of our representatives will be happy to answer any questions you may have. You can also follow us on your favorite social media platform: find us on Facebook as Key Title & Escrow or follow us on Twitter @KeyTitle_Escrow