How to Cancel a Real Estate Contract | Tomei Law Firm
We are often asked by our clients if it is possible to cancel a real estate contract. It’s a question that neither party, buyer or seller, anticipates having to consider. Yet, it is not uncommon for parties to get out of a real estate contract. In fact, some 4% of sales fall through each year. If you are a party seeking to get out of a real estate contract, it is important to know your rights and the potential consequences of canceling a contract.
Contact Your Attorney Regarding Your Intent to Cancel the Contract
Real estate contracts can be complicated and confusing. As a general matter real estate contracts will have what are known as contingencies. Contingencies are events that need to occur in order for a real estate contract to become binding. Common provisions include financing and appraisal contingencies, home inspections and a specified date for closing, among others. The parties are, however, free to draft their own contingencies. For instance, the buyer could make the purchase contingent on the sale of his or her existing home. If the buyer is unable to sell his or her home by a specified date, the seller could cancel the contract.
Contingencies are commonly relied on by parties seeking to get out of a real estate contract. An experienced real estate attorney on your side can advise you of your rights and duties, whether that is attempting to terminate or enforce the agreement.
Look for Unsatisfied Contingencies and/or Opt Out Clauses
If you want to get out of a real estate contract your attorney can assist you in identifying unsatisfied contingencies. Here we take a look at some of the more common contingencies relied on by parties when considering how to cancel a real estate contract.
A financing contingency, or mortgage contingency, is used when a buyer is taking out a mortgage to buy the property. Most buyers will have a preapproval letter from a bank when shopping for a home. A copy of the preapproval letter is generally attached to the buyer’s written offer. Preapproval letters give the seller a level of comfort that the buyer will have the funds to proceed to closing.
However, a preapproval letter is not a guarantee of financing. Like a real estate contract, a preapproval letter is typically contingent on a number of things. First, at the time preapproval is issued, the lender does not even know what property the buyer is purchasing. A property serves as collateral for the lender in the event the buyer fails to make his or her mortgage payments. As such, the lender requires that there be sufficient equity in the property to protect its interest. Thus, the lender will want to complete an appraisal on the property prior to lending money.
Secondly, preapprovals are often given prior to the lender verifying important information about the borrower. The lender will want to see proof of the borrower’s income, assets and liabilities. If these documents do not support the figures on the loan application, the lender will not approve the mortgage. Finally, the borrower’s financial circumstances may change dramatically from the time that he or she applied for the mortgage and closing. For instance, the borrower may have lost a job or incurred additional liabilities.
Most real estate contracts will give the buyer a period of 45 days or more to secure a mortgage. A well drafted contract will go even further, specifying the loan terms that a buyer must be approved for. As a general matter, if the buyer fails to obtain a mortgage by the specified date, either the buyer or seller can opt to terminate the contract.
Mortgage contingencies can be an effective way to get out of a real estate contract. One important point to keep in mind, however, is that the buyer must act in good faith in applying for a mortgage. In other words, a buyer cannot simply let the deadline pass without applying for a mortgage and later rely on the mortgage contingency to cancel the contract. The buyer must be prepared to demonstrate that he or she sought financing from one or more lenders.
Homeowner Association (HOA) Contingencies
HOA contingencies apply for buyers purchasing a home that is part of a homeowners’ association. An HOA contingency makes the contact contingent on reviewing and approving the HOA rules and regulations. The purpose of this contingency is for the buyer to ensure that he or she will be able to use the property as intended. For example, suppose the buyer has a young child or a pet and is in need of a fenced yard. The seller informs the buyer that installing a fence will not be a problem. However, the HOA documents provide that homes may not have a fenced in yard. In this example, provided the buyer properly serves notice of cancellation under HOA provision, he or she will be able to terminate the agreement and get back the earnest money deposit.
HOA contingencies can be effective for those parties considering how to cancel a real estate contract. It is important to have your attorney carefully review HOA documents and to advise you of all restrictions you will be subject to.
Septic Inspection Contingency
homes that are not connected to a public sewer system, there will likely be a
provision in the real estate contract that makes the sale contingent on an
inspection of the septic system. Issues with the septic system can be very costly to repair.
An inspector will check to see if the septic system is operating properly and
that it has been recently pumped. Issues such as a high level of sewage can be
indicative of a major problem and can trigger the contingency. The buyer must
timely notify the seller of any issues and request that they be remediated. If
the seller refuses, the buyer may be able to get out of the real estate
Other Contingencies to Consider
There are many contingencies that you should be aware of when considering how to cancel a real estate contract. We have merely discussed a few of the more commonly used ones. Some other common contingencies to keep an eye out for are:
- Home Inspection
- Pest Inspection
- Well Water
- Permit and Certificates of Compliance
- Selling Another Property
Understand the Consequences of Withdrawing from the Agreement
If you are considering how to cancel a real estate contract, it is important that you understand the consequences of withdrawing from the agreement. You could risk losing your earnest money deposit and even face additional damages. Contingencies that are properly invoked may help parties to get out of a real estate contract and recover the earnest money deposit. If you are considering withdrawing from a real estate contract, contact an experienced real estate attorney today to discuss your options.