Imagine you find your dream home, make an affordable offer, and it’s accepted. You’re a homeowner, right?
Don’t start celebrating yet; even with an executed contract things can still fall apart. What if your financing falls through? What if you find a better house? What if you just change your mind?
First, whether it’s called an accepted offer or an executed contract (there’s no substantive difference between these terms), you absolutely can walk away. But depending on the circ*mstances, you can face legal and/or financial consequences.
In this blog, we take a comprehensive look at why an executed contract might be canceled. And walk you through the steps to take to back out of an accepted offer.
Reasons to Back Out of an Executed Real Estate Contract (AKA an Accepted Offer)
Any number or combination of changes occurring during the homebuying process can sour an accepted offer. For example, potential buyer issues may include financing falling through. Or there may be something wrong with the property you want to buy. Finally, even after accepting an offer, the seller may cancel the deal.
Let’s look at these different issues one by one.
Personal Finance Issues
The most obvious reason you’d be unable to complete your home purchase is being unable to pay for it. Being dismissed from your job or having to cover a large, unexpected expense would be strong reasons to back out of an executed contract. This contingency may even be covered in the contract language.
Losing your source of income isn’t the only reason your financing might collapse, however. Contracts typically have a financing contingency that requires buyers to secure financing by a deadline. If your financing collapses and you can’t find another lender in time, you may have no choice but to walk away from the deal.
You Have a Home Sale Contingency
Contracts themselves come with all sorts of common contingencies, not just financial ones. Your contract may include acceptable reasons for cancellation without penalty. For example, if the purchase is contingent upon selling your previous home by a certain date.
Cold Feet
Sometimes, a simple change of heart is enough to dissuade a buyer from completing a home purchase. You may simply decide you don’t want the house after all. But beware, if your timing and reasoning for walking away don’t fall within the terms of your contract, this kind of decision may result in negative financial, or even legal, consequences. We will discuss potential consequences later on.
Finally, what do you do if you find another, better, or more desirable property? Maybe your dream house just came on the market, and this is your one chance. While changing your mind in this way is certainly understandable, doing so doesn’t remove your financial responsibility, for example for earnest money, and you could even face legal action.
A good rule of thumb is to work with your real estate agent and/or attorney to be as familiar with your purchase agreement as possible. Find a way to use the contract and its contingencies to your advantage so you can walk away with minimum penalties.
Home Inspection or Other Property Issues
Because houses can suffer from serious, and often less than obvious, issues that would keep most buyers from wanting to buy them, your contract should include language that will let you walk away from the deal. This language may be written in the form of a home inspection contingency, an appraisal contingency, or sometimes even a title contingency.
Even though home inspection and appraisal contingencies are common, in June of 2021, nearly one-third of homebuyers waived appraisal and inspection; however, that amount has been trending down more recently.
Property-related contingencies are important for buyers, because discovering an expensive problem – such as mold, termites, or radon – during a home inspection is often a straightforward way to break an executed contract with minimal penalty. Likewise, if your appraisal comes in below the purchase price of your home, your mortgage lender may pull financing. This is especially true if you can’t simply make up the difference.
Other potential property issues that may encourage you to walk away from a purchase include problems with the title to the home. If the seller is unable to resolve liens or disputes by a date included in your contract, you may have sufficient grounds to cancel the deal.
Likewise, new information about the property, neighborhood, or town, may be sufficient reason you’d want to walk away, whether you have to incur penalties or not. The bottom line is this: Nobody wants to buy a home they’re going to hate living in.
Again, knowing your contract like the back of your hand is the best way to resolve issues with the property that sour the deal for you. So study up or consult an attorney regarding your options!
Seller Issues
Remember, the seller can rescind their acceptance of your offer under certain conditions, too. Without going into too much detail, these include:
- Unfulfilled contract provisions
- Unmet financing or documentation deadlines
- Mutual agreement
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How to Back Out of an Accepted Offer
The best way to avoid the need to back out of a contract is to avoid promises you’ll have trouble keeping if the offer is accepted. So, it should go without saying, but don’t offer to pay more for a house than you can afford. And don’t waive contingencies you feel you shouldn’t.
In a competitive market, you may feel pressure to skip inspection and waive the inspection contingency, particularly if you don’t think it’s necessary. You may also feel pressure to skip the appraisal if your lender doesn’t require it. While doing so can make you a more attractive buyer, it’s best to balance the pros of this decision with the cons.
Another good rule of thumb is to simply weigh the relative costs associated with moving forward against those of backing out.
If you calculate that backing out will save you money, here are seven steps to follow:
- Once decided, don’t wait – move forward immediately.
- Contact your real estate agent to discuss the situation and make a plan.
- Consider consulting a real estate attorney for legal guidance. Some states require an attorney to be involved in a home purchase anyway, while some do not.
- With or without an attorney, use the provisions of the contract to walk away with the least possible cost.
- If such provisions don’t apply to your situation, ensure you are ready to pay for walking away. Remember: Breaking an executed contract can cause legal difficulties, is likely to cost you money, and will definitely cost you time and effort.
- Contact the seller through your real estate agent or real estate attorney, and inform them in writing of your intentions. Common practice may mean your agent does this on their own, or local law may require your attorney to do so, which can protect you from making mistakes with language or legal terminology.
- Finally, if you find you just can’t afford the consequences, consider the alternatives included below.
Common Consequences of Backing Out of an Accepted Offer
Unless you have a reason outlined in your executed contract, backing out of an accepted offer is likely to bring some kind of consequences. Let’s take a look at what they might be.
Financial Consequences
If you’ve already made your earnest money deposit, walking away from the deal may mean forfeiting it permanently. Also, if the seller has paid for contractually required services, like inspection or appraisal, you may be on the hook to cover those costs as well.
Legal Consequences
Depending upon why you chose to back out of the deal, you may be sued for breach of contract and request court to make you perform under the contract, although that is rare. There’s any number of reasons why, but it’s reasonable to assume that if the seller thinks you’re not acting in good faith, they may view legal action as a means to enforce their legal rights.
Reputation Consequences
Real estate agents are a tight-knit group, so backing out of an offer may sour your relationship with your agent. Further, your agent may warn other agents to not work with you, meaning finding another house could be quite difficult.
Market Consequences
The housing market tends to ebb and flow, so falling sale prices or interest rates may impact what you are able to afford. Depending upon how long the process has taken to unfold after backing out of your original deal, you may find that housing costs have risen, even considerably. It’s also possible interest rates have increased. Put the two together, and you may no longer be able to afford even the house you had originally tried to purchase.
Credit Consequences
Here’s some good news: Backing out of a contract won’t directly affect your credit score, because terminating a purchase contract isn’t reported to credit bureaus. But if you’ve already had a “hard inquiry,” also known as a “hard pull,” on your credit report, backing out means you will have to repeat this portion of the process if you choose to purchase another home.
All hard credit inquiries result in a small temporary drop in your credit score, so multiple inquiries will result in additional deductions – unless the inquiries are made close together. Multiple mortgage inquiries may be grouped into one inquiry for a customer who is rate shopping so long as those inquiries are made within a 14-45 day window.
Also, hard inquiries show up on your credit report for 2 years, but typically only affect credit score for the first one. And hard inquiries can affect different buyers in different ways, so if you have a short credit history with lots of hard pulls, you’re likely to incur a more substantial impact.
Stress-related Consequences: Health, Relationships
Buying a house is one of the most stressful activities people undertake in life. In fact, a 2022 survey found at least half of homebuyers cried at some point during the homebuying process because of related stress.
Finally, it should go without saying, but if you cancel an accepted offer, you won’t get the property. If it’s your dream home, try to figure out some way to make the deal work for you and the seller. Changing your mind after opting to back out of the deal is likely to amplify difficulty with the seller; they may simply refuse to do business with you under any circ*mstances.
Alternatives to Backing Out of a Deal
Remember that backing out of an accepted purchase offer is a big decision, so if possible, think about working with the seller to find a compromise.
If the property has issues, you can ask for repairs or other remediation of the property. Other possible options include asking for a reduction in overall cost, typically by applying a credit at closing. If accepted, this compromise will keep the process moving. It will also allow you to hire the contractor you want to make sure the work is done the way you want, or you can just do the work yourself and save even more money.
Remember, the key to compromising is being prepared to make some concessions yourself.
The Bottom Line
Ultimately, you shouldn’t back out of a home purchase agreement unless you’re certain the alternative is a mistake. Try to use the contract to your advantage, but be ready to pay for it or to even be sued. But aside from that, rest assured, no one wants to buy a house they don’t want to live in.
