What Happens If a Buyer Backs Out of a Real Estate Contract?

If you’re lucky and well-prepared, your home transaction will go through without any hitches. In reality, there are often bumps in the road. It’s not uncommon for a real estate deal to fall apart, and it’s important to understand what the rules are if this happens, regardless of whether you’re the buyer or the seller.

In this blog, we take you through what happens when a buyer backs out of a real estate contract, including who gets the earnest money when a buyer backs out, what the risks are of backing out, and some of the issues that can void a purchase agreement.

Can a Buyer Back Out of a Real Estate Contract?

A purchase agreement, once signed, is legally binding, so when a buyer backs out of a home sale, it can be costly for them. However, purchase agreements can include conditions. If these conditions are not met, the buyer can legally cancel the contract.

Here are some common conditions found in purchase agreements:

• Home Inspection

This allows the buyer to hire a home inspector. If major issues are found, the buyer can ask the seller to fix them or renegotiate the price. If these options aren’t available, the buyer backs out of the home sale with no consequences.

• Financing

Even with pre-approval, a buyer may not be able to secure financing. If this happens, and the buyer backs out of the real estate contract, they may be able to walk away and keep their earnest money.

• Appraisal

Appraisals are required by most mortgage lenders. If the home appraisal comes in lower than the purchase price, the buyer can back out of the contract entirely or renegotiate the price.

• Title Search

Under this condition, buyers can review the home’s title to ensure there are no liens against it or unresolved legal issues such as ownership disputes. If any of these apply, the buyer backs out of the home sale free and clear.

• Current Home Sale

Some offers are conditional on the buyers selling their current home. If they are unable to do so within the specified time, they can cancel the real estate deal.

• Insurance

Under this contingency, the buyer backs out of the real estate contract without financial consequences if they can’t get adequate insurance for the home. Although this may seem unusual, it has become more common in areas that are prone to environmental risks such as floods and fire.

What Happens to Earnest Money if a Buyer Backs Out?

What is Earnest Money?

Earnest money is a cash deposit the buyer makes on a home as a commitment to going through with the purchase. Earnest money is usually between 1% and 3% of the purchase price of a house. This money is held in escrow until the real estate transaction closes or the contract of sale is cancelled.

Earnest money benefits both the buyer and the seller. It indicates that the buyer is serious about the transaction, giving the seller confidence in the buyer’s intent. For the buyer, earnest money can make their offer more attractive in a competitive market. Since the seller usually takes the home off the market after receiving the earnest money deposit, the buyer has time to arrange for inspections, financing, and any other contingencies without having to worry about competing offers.

Who Gets the Earnest Money When a Buyer Backs Out?

The question of who gets the earnest money when a buyer backs out of a home sale depends on the contingencies written into the contract. If any of those contingencies are not met they can cancel the purchase agreement and get their deposit back. For example, if the buyer’s financing falls through or their insurance doesn’t work out when purchasing.

However, if the buyer backs out of the home sale because they changed their mind, they may forfeit their deposit. If that happens, the seller may be able to keep the earnest money. If the buyer and seller disagree about the disposition of the deposit, the earnest money remains in escrow until the dispute is settled. That can happen privately or in court.

What Happens If a Buyer Backs Out After the Contingencies Are Removed?

If a buyer backs out of a real estate contract after the contingencies are removed, they will almost certainly lose their earnest money. There could also be additional consequences. Specifically, if the seller has to re-list the home and sells it for less than the original offer, they can sue for the difference. The seller can also sue for additional expenses they incur, such as mortgage/carrying costs, legal fees, and storage expenses.

The Bottom Line: The Purchase Contract Matters

When a buyer backs out of a home sale, they risk their earnest money deposit and potentially more. Buyers can best protect themselves by adding the right contingencies to the purchase contract. It’s good to work with a qualified real estate agent or attorney to review the contract. It’s recommended to refuse to waive contingencies unless they are completely certain those contingencies aren’t needed.

Whether you’re a buyer or a seller, an experienced real estate agent can protect you from the negative consequences of a cancelled contract. Connect with a REMAX agent for trusted guidance through every step of your real estate transaction.