Bankrate: Can you back out of a house offer once it’s accepted?

When you’re buying a home, the sale can fall through for many reasons. But what if you just change your mind? If you’re in contract to buy a home but are having second thoughts and want to back out of your accepted purchase offer, things can get complicated. When is it too late to back out of buying a house?

It’s not impossible for a buyer to back out of a signed real estate contract with a seller, but there could be repercussions — especially if no escape hatches were included in the deal. Understanding your financial and legal rights as a homebuyer is critical. Here’s what to consider if you’re thinking about rescinding an accepted offer.

Can a buyer back out of an accepted house offer?

The short answer: yes. When you sign a purchase agreement for real estate, you’re legally bound to the contract terms, and you’ll give the seller an upfront deposit called earnest money. Your earnest money deposit shows the seller that you’re serious about your intention to purchase the house and plan to follow through on the agreement.

“It’s not fair to the seller to pull their home off of the market if a buyer is not totally serious,” says Marc Hagerthey, a real estate agent with RE/MAX in Maryland. “The earnest money will sit in an escrow account and will be used to pay a portion of the closing costs at settlement.”

However, putting certain contingencies in place makes it perfectly legal to withdraw your offer on a house after it’s accepted if those contingencies are not met. These restrictions, which will be built into the contract, spell out situations in which backing out without penalty would be acceptable. In most cases, you’ll get your earnest money back.

Backing out with a contingency

A standard real estate contract typically comes with a number of contingencies — these are the conditions that must be met in order for you to move forward with a home purchase. This includes a mutual agreement of specific tasks that have to be completed within a certain time frame.

Homebuyers might include contingencies for the home inspection, securing financing with their lender, selling their own home first or the home appraising for less than the sale price. If you back out of an offer because an agreed-upon contingency failed to be met, you can do so with little fuss and still get your earnest money deposit back.

A buyer usually has more protection when walking away from a deal if contingencies are in place. For example, let’s say a home inspection report comes back and there are costly issues, such as a damaged roof that needs to be replaced or cracks in the foundation. With a home inspection contingency in place, you can walk away from the deal — especially if the seller refuses to fix the problem or offer credits to offset the costs. Another important safeguard is a financing contingency, which gives you an out if your lender doesn’t pull through with a loan approval.

To protect yourself, pay careful attention to the contingencies outlined in the agreement, and especially to the deadlines attached to each. For example, you might be required to complete a home inspection (and ask for any repairs/credits) within 14 days after the contract is assigned. A financing contingency might need to be met within 30 days to get final loan approval. If you’re not sure about something or you need more time to complete a contingent task, ask your real estate agent. They will likely need to file a contract addendum that the seller must approve to get your extension.

Backing out without a contingency

If a homebuyer backs out of a sale for a reason that’s not specifically stipulated in the contract, however, things can get tricky — and potentially ugly. Backing out of an offer for a non-contingent reason means you risk losing your earnest money. Since you put that money down based on the promise that you would follow through with the contract, backing out for any reason that’s not outlined in the agreement means the seller is legally permitted to keep your money.

This can be prohibitively costly for a buyer, especially if they still hope to buy a different house. Earnest money deposits typically run around 1% or 2% of the home’s purchase price, and sometimes more. So, on a $300,000 home, a buyer with cold feet could stand to lose between $3,000 and $6,000, plus legal fees.

Can a seller sue you for backing out?

Again, the short answer is yes. If you back out of a signed contract for a reason not explicitly stipulated as a contingency, not only do you risk losing your earnest money, but the seller could possibly seek further legal action. It’s easier to back out of buying a house before the purchase agreement is signed. If you decide to exit after that point, or after the contingency periods have expired, you’ll have a much harder time doing so without landing in legal or financial trouble.

A buyer in breach of contract could potentially be sued for what’s called “specific performance,” in which the court forces the buyer to close on the home. However, this scenario is not very common. “It’s pretty rare that this happens,” says John Graff, CEO of Ashby & Graff Real Estate in Los Angeles. “You’re more likely to see the courts ordering a seller to close a sale, not the other way around.”

In some states, home purchase agreements have a clause that requires both parties to agree to mediation if there is a dispute. That means you’ll have a chance to plead your case to the seller directly, with the help of a neutral mediator — and, hopefully, resolve the issue outside of a courtroom.

Bottom line: How to get out of a home purchase contract

Buying a home is a serious commitment and shouldn’t be taken lightly. It is possible for a buyer to back out of a signed real estate contract with a seller, but there may be serious consequences. The best way to protect yourself is to build contingencies into the contract upfront, before signing. Working with an experienced real estate agent, and possibly a real estate attorney as well, can be crucial here.

If you do need to back out of an accepted offer, be honest with the seller as soon as you’ve made your decision. Work closely with your agent and attorney, who can help you communicate (in writing) why you want to back out. Ultimately, you may lose your earnest money deposit — but buying a home you don’t want or can’t afford would certainly be a more expensive mistake in the long run.