What to Know About Backing Out of a Contract
When a Real Estate client desires to break a Real Estate contract, you know the next few days of your life will probably not be too pleasant. It is usually a highly charged emotional event when people want to break a contract!
In Massachusetts, we are a two-contract state. When a buyer wishes to purchase a property, more often than not, they will fill out what is known as an offer to purchase contract.
This is followed up with a purchase and sale agreement with the same terms and conditions as the offer form but spelled out in much greater detail.
The offer-to-purchase contract includes all the significant terms in the deal, including the offer amount, a consideration which is the amount the buyer is putting in escrow to secure the property, as well as the agreed-upon closing date and any contingencies.
Real Estate Contingencies Allow You to Cancel Contract
The most common contingencies include the buyer’s ability to obtain financing and the home inspections they would like to perform. These include home, pest, radon, well, mold, lead paint, and others.
The typical amount you almost always see for initial consideration on a Massachusetts offer form is $500-$1000. When the buyer signs the purchase and sale agreement, the buyer will typically put a balance of 5% in escrow.
Although this is the amount you see most often, a deposit is always open for negotiations. Sometimes a buyer might not quite have the 5% to put down.
Real Estate agents will change the listing status in the multiple listing service to either contingent or pending when a home has an accepted contract.
Over the course of my real estate career, buyers and sellers have asked me if I can back out of my real estate contract. Different answers depend on who asks the question (a buyer or seller) and where they are in the transaction process.
Can You Back Out of a Contract?
Can a seller back out of a real estate contract will bring a different answer than a buyer.
Below you will find an explanation and the excellent reference above that comprehensively explains.
There are always consequences for breaking a contract. For a seller, the consequences are far more significant than for a buyer if you try to back out of a sale. The buyer can, in fact, sue for performance. The buyer is typically liable for no more than their escrow deposit.
The other contract that people ask about breaking is the agreement between a seller and a Realtor. It probably does not surprise that several clients become unhappy with their Realtor and want out. The article above also explains all you need to know about getting out of a contract with a real estate agent.
Breaking a Real Estate Contract as a Buyer
Most of the time, the person that wants to get out of a Real Estate contract is the buyer. There could be many reasons a buyer would wish to terminate a contract, from general home inspection issues to the discovery of mold or radon or some other unforeseen problem with a property.
If the buyer has a contingency within the contract for the reason they wish to terminate, then there is no issue, and the buyer will receive their deposit back in full.
There is always the possibility that a buyer could try to back out of a Real Estate contract after all their contingency dates have lapsed.
In this case, the seller would be entitled to keep the earnest money deposit in escrow. It is possible that the seller could sue the buyer for damages, but in my experience, most of the Real Estate contracts that I have seem to limit the seller’s damages to the deposit amount.
Breaking a Real Estate Contract as a Seller
What about the seller backing out of a contract? This is a question that I often have to educate my seller clients on. Many folks do not realize that an Offer to Purchase Real Estate in Massachusetts is a BINDING contract. A buyer could sue you for performance and force you to sell your home.
Sometimes sellers can feel remorse and feel like they no longer want to sell after signing a contract with a buyer. There could be any number of reasons for this happening.
Maybe the house the seller wanted to purchase is no longer available, or some health issue crops up with one of the parties that makes selling difficult. There could be an endless amount of reasons.
What do you do if you sell your home, have a signed contract, and feel you want to break the contract? The 1st thing you would want to do is make your listing agent aware of the situation and get in touch with the buyer’s agent.
As a seller, you will probably feel like you are on a stormy island of your own, as all the other parties in the transaction will not be too happy with your decision.
What Sellers Should Do When Trying to Back Out of a Contract
You can more than likely expect the following:
- Be prepared to release the buyer’s escrow money to them with any accumulated interest.
- Most buyers will likely want to be reimbursed for any out-of-pocket expenses they realized during the transaction. These expenses could include inspections, mortgage application fees, mortgage lock-in fees, attorney expenses, etc.
- Additional complications could include interim housing expenses if they have already sold their home and were expecting to move into yours.
- A change in interest rates could be another complicating factor if rates have risen when they were under contract. Be prepared to buy down their mortgage rate if they ask.
As a seller, you must remember that you are breaking a contract in this circumstance. To remain in your home, you must be as pleasant as pie to a buyer.
The buyer could easily drag you into court to force what is known as “specific performance,” where you are forced to sell your home and reimburse the buyer for any of their costs associated with this mess.
Obviously, the best-case scenario would be a very understanding buyer who lets you excuse yourself from the contract. Not every buyer is going to be so kind.
Final Thoughts on Terminating Contracts
If you find yourself in this situation, a competent Real Estate attorney would be a must! A Real Estate attorney would be able to negotiate the best possible settlement with the buyers or their lawyer.
Other Real Estate Articles Worth Reading:
- Massachusetts Seller’s statement of property condition – see what to know as a seller disclosing issues about your home.
- Handling Massachusetts Real Estate offers – see some of the essential things you need to know about offers when selling a home.
About the Author: The above Real Estate information on buyers or sellers terminating a real estate contract was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at email@example.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.
Thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
Bill this is a very well written article about Massachusetts contract law when buying and selling a home. I am sure there are quite a few home sellers that do not realize that once they sign a Real Estate contract it is very hard to break!
Sandra you are right about that! Even though the Massachusetts Real Estate contracts say right on them that they are a legally binding document, many sellers assume that if they change their mind there will be no issue.
Bill, We ran into this situation in fact recently. The sellers signed the purchase contract, and decided not to sell their house before signing the P&S agreement. Can they walk away without any legal responsibility because of not signing the P&S agreement?
Stephen – If you have a signed offer and have met the contingencies that were to happen prior to the signing of the P&S then you probably have legal grounds to force the seller into selling the property to you. The offer is a legal and binding agreement in Massachusetts. This is something you will want to consult an attorney with. Good luck!
Last year or so we put down 5k on a house at the time of closing no one showed up come to find out the bank had not given them sufficient paperwork to close on this forclosure. we, the buyer wanted our $ back the offered only 1/2 back. we refused hired a lawyer who “sold us down the river” and left us hangin’ with multiple excuses for about a year until his sec’y, feelin sorry for us sent us copies of what he’s been doing behind our back including a letter he sent to the other side basically saying he’s sorry he even bothered and that he knew he was dropping the ball. ending it by saying “by the grace of God go I”! How pathetic. Moreover, I’m scared and alone, but I am preparing to bring a civil case against the broker who has the $in escrow and should not have released it to anyone , and the seller,and whoever else I should sue. Any pertinent advice/assistance will be GREATLY appreciated as I realize tooo much time has already slipped by. BTW, do you know what the statute is for MA? Anyway, I cannot just do nothing I must get these folks into court win or lose!
Ester sorry to hear about your situation. Going forward on hope you have a good attorney representing you! I believe the statute in Mass is 3 years but check with your attorney.
I purchased a house about a year and a half ago. The deal was a “flip”. A company was purchasing the property as a short sale and selling to us while taking a profit. We signed a P&S and gave them a deposit knowing this information. Our P&S said the deal was subject to them taking title first.
They wanted to do a dry close meaning we had to sign all closing docs in escrow before taking title. We refused to sign anything until they took title and the original bank/seller pulled the deal from the 3rd party company. We ended up purchasing from the original buyer (at a higher price due to the 3rd party company/real estate agent raising hell), but the real estate company refuses to give us our deposit back because the 3rd party company is stating that they have a claim to the money.
Is there any recourse we can take? I have contacted an attorney, but I know getting it back won’t be cheap.
This is a question only a lawyer is qualified to answer. My guess is you will get the money back.
Hi Bill, what recourse do we have for getting our Offer to Purchase contract money back. We put a $1000 down on a offer to purchase. The seller backed out before we got the P&S. Our money is being held in escrow by the sellers realtor. The realtor agrees as well as the seller’s attorney that we are entitled to the money but tells us he can’t give us the money until the seller signs a release form. The seller refuses to sign the form. Is the realtor under any obligation to return our money? It has been weeks and it is infuriating that they can hold on to our money.
Deb I can understand completely why you are frustrated. The seller should be returning the signed release immediately. The Realtor is just doing what they are supposed to do as an escr0w agent by holding on to the money. As an escrow agent you are not allowed to release funds without both parties signatures. Obviously the seller for whatever reason is trying to piss you off. You could always threaten to put a lien against his house in the amount of the deposit.
I have an offer to purchase which is set to expire on Oct.31, 5:00pm. The buyers just did a radon test and told me that I have to give them an extension because of the time it takes to get the results back. Is this correct? They had plenty of time to do a radon test before the home inspection which was Wed. 10/26/2011
I am asking a question on behalf of my sister. She is currently the buyer on a Bank Owned Home. The Bank is now trying to back out of the Contract. They have already signed both contracts and they were already to close. But now the bank is saying they do not want to Sell at that price.
Can they renogiate the price? And are they allowed to just back out of the contract? I understand that if they do back out they will be given back their earnest money deposits. But how hard will it be to get re-imbursed for all the inspection fees that they incurred since they went FHA?
PLEASE HELP. I just found out today.
Nancy if the home was in Massachusetts and their was a standard purchase and sale agreement signed the seller does not have the legal right to back out. The buyer could sue for performance and the bank would lose.
Thanks so much for the quick response Bill.
My sister is actually meeting with her Real Estate Agent tonight to find out the details about this. I told her to not give in until she knows the exact reasoning for the Bank trying to Back out. I have also recommended this page for her.
I will update you more later. 🙂
Hi we are the sellers and in the purchase and sales that the buyers attorney drafted we had a 60 day contingency to execute a purchase and sales on new property we could not find anything after trying and trying. The market exploded and we could not afford a house that would meet our needs. So after the 60 days we told buyers that we were not going to extend the sale and that we were going to relist at a higher price due to market dictation, if we had more maybe we could find something. They are now saying that we did not act in good faith?? If we looked at over 50 house and could not find anything how is that not acting in good faith? Isn’t that contingency binding since in was in the P&S and written by the buyers attorney? Thanks
Hi Joe if everything you describe is 100 percent accurate it sounds like you followed the letter of the contract. Did you not have an attorney representing you? This is really something you should follow up with a lawyer on.
Can a seller back out of a house sale after signing the P&S agreement? If so, what are possible penalties?
Gaby no you can not. A buyer can sue for performance.
Here’s my situation. Selling property. Signed P&S agreement. Buyer put 5,000 in escrow. Contingency time ran out and 2 days before closing buyer asked for an extension for closing. Granted 30 days with the stipulation that the escrow funds are non-refundable. Buyer signed the contract. He then backed out of the deal and wants his 5000. back. Aren’t we as the sellers entitled to it? Thank you, Polly
Hi Polly – according to what you have written here you would be entitled to the buyers deposit unless there were other contingencies that were extended as well such as a mortgage commitment.
Can a buyer or seller back out of a offer to purchase contract if it was signed after the expiration date of the offer? What if the negotiations continued over text and email?
Dave this is a question you would want to ask a lawyer but in my opinion I don’t think you could back out.
we just signed an offer and then decided to cancel on the next day. Can the seller force us to sell the house?
Vicky I assume you mean can the buyer force you to sell the house? The answer is probably yes. An offer is a legal and binding contract so as long as the buyer meets their obligations you would need to follow through or the buyer could sue you for performance.
how much am I likely to pay in damages if the buyer could sue me for performance?
It wouldn’t be damages – they could sue for performance to make you sell it to them. This probably won’t happen but they could.
A buyer’s realtor who also represents a seller on the sale of his/her property. The realtor doesn’t have any direct listing contract with the seller previously to the showing of the property. However, on the Offer to Purchase, the realtor sneaks in a sentence saying that at the time of closing, the seller will have to pay him/her 3% of commission. After the seller signed to accept the offer from the buyer, does he/she has an option NOT to pay the realtor the 3% commission due to the fact that there is no listing contract between them and/or because the realtor shows conflicts of interest in serving both parties in the same transaction?
Lily I am kind of confused by your question. How is the agent representing you if there is no listing contract with the agent? Did you sign an agency disclosure form that states the agent is representing you? Regarding the contract my best guess is you would have to pay the stated commission but this is something you would want to ask an attorney to be certain.
Thanks Bill for your answer. To clarify the situation, the agent is my neighbor and there is no signed agency disclosure form that state he is representing me or I’m listing the house with his company. I just orrally told him that I’m thinking about selling my house and he brought a buyer to show my property. In this case, do I still have to pay him the commision based on the offer that I accepted from the buyer alone?
MA house. Offer accepted contingent on inspection, no mold, no radon, no fire hazards, etc. Standard offer, basically. Inspection found many issues. The only things we asked the seller to cover were the health/safety issues. (Mold/water damage/water leak and radon 22+ in basement). Seller denies there’s an issue at all (even tried to hide it from mold inspector by scrubbing the baseboards/walls) and now says if we don’t take the house as is, they’re breaking contract and keeping their home. Can they do that since it’s an issue about who should pay for radon/mold as opposed to just changing their minds?
Hi Carla – a seller is never obligated to correct issues found from a home inspection in their home. If the seller is not interested in correcting these problems you will need to decide if you like the home enough to take them on yourself.
Sorry. I said that wrong. We originally asked them to cover the costs they said no. We offered to raise our offer price of the home to cover the costs so that it would be done before closing and us moving in, they said no. They don’t want to pay for any repairs (with our money). They say there isn’t a mold/radon issue so they’re not going to entertain doing anything to the house before closing. They’re insisting we take the house as is without remediation before closing no matter who covers the cost. (No, they have not brought in their own specialists.) And yes, reading back over this I’m wondering why we’re still dealing with these people.
Oh and thank you so much for answering so quickly!! Your articles are very informative!
No problem Carla – unfortunately you can never force a seller to fix an issue. If they want to sell it as is that is their choice. They will learn the hard way when the next buyer comes along and wants these issues fixed as well.