You made an offer on a home, but now you are having second thoughts. Are you able to back out of the sale or will you face serious repercussions?
While there isn’t a cut and dry answer to this question, there are ways you can tell what would happen if you change your mind. It depends on the contract that you signed and the agreed upon circumstances within that contract.
What Could You Lose?
First, let’s look at the worst-case scenario. You put in a bid on a home and the seller accepts it. You make it official by signing and executing the purchase contract. As a part of the contract, you pay the seller 2% of the sales price in earnest money. On a $300,000 home, this means $6,000. The seller doesn’t take possession of the money right away, though, it sits in an escrow account until the deal completes.
Now, if you were to just decide to walk away from the deal and not buy the home, that $6,000 is at stake. The seller may be able to keep it, but it depends on the circumstances. If you just flat out changed your mind and don’t have good reason to back it up, yes, the seller will keep your $6,000 for his time and for taking the house off the market.
If you have good reason and it’s a reason that’s included in your contract as a ‘contingency,’ you may walk away from the sale with your earnest money in hand.
What are Contingencies?
If you use a real estate agent, and more importantly a real estate attorney, chances are that you’ll have some contingencies in your contract. These are legal statements that enable you to back out of the contract without any consequences. Not every buyer will have contingencies, but if they do, the most common contingencies used are as follows:
- Inspection – This gives you a specific period to have an inspection conducted. During that time, you have the right to back out of the contract with your earnest money intact should the report come back stating that something is wrong with the house. You usually get 7 days to get the inspection completed and make your decision. If you decide to back out of the contract, you must do so in writing within that 7-day or designated period.
- Sale of home – If you have a home to sell in order to secure the financing for the new home, you may want to include the home sale contingency. This allows you time to sell your home in order to buy the new one. Usually, you can have up to 30 days to get this one. If you don’t have a bona fide contract on your home within that time, you can back out of your purchase contract without consequence.
- Appraisal –A major factor in your ability to secure financing for a home is the value of the home. If the appraisal comes back with a lower value than the amount you agreed to pay for it, the bank won’t be able to provide you with financing. If they can, you will have to come up with the difference between the value and the purchase price in cash, which isn’t an option for everyone. As long as the appraisal is completed within the timeframe of the contingency and you cancel the sale within the time as well, you can still walk away with your earnest money.
Without proper contingencies in place, it could be hard to back out of an accepted offer. Many sellers will just keep your earnest money, leaving you with a lighter pocketbook but without the requirement to buy the home. In the worst case, scenario though, there is a chance that the seller could take you to court. In order to avoid this, give it careful thought before putting a bid on a home and make sure you consult with a real estate attorney to make sure that all necessary contingencies are in place.