How to Tactfully Back Out of a Real Estate Contract

Here are your best options for backing out of buying or selling a home during the coronavirus pandemic.

U.S. News & World Report

How to Back Out of a Real Estate Deal

Portrait of a real estate agent consulting a mature couple at office

Buyers and sellers may have more flexibility with real estate transactions during the coronavirus pandemic.(Getty Images)

The goal of any real estate deal is for all parties to come away happy – whether it’s the home seller pleased with the profit, the buyer excited to start life in a new home or the real estate agents satisfied with the clients' success and commission.

But what if, before that deal closes, it doesn’t feel right anymore? Especially as the COVID-19 pandemic leads to widespread economic uncertainty and expectations for a recession, many people who may have felt confident in buying or selling a home a few weeks ago may now feel worried about a major change.

“No contract in the country will contemplate for a pandemic of this nature, so off the bat, there will likely not be a clear out in the contract for a pandemic or health issues,” says Pierre Debbas, partner and founding member of law firm Romer Debbas LLP in New York City.

Whether the deal doesn’t seem quite as good as before or quarantine measures mean you need to stay where you are, there are opportunities to back out of a real estate contract. With the right contract contingencies and clear communication with your real estate agent, it’s possible to emerge relatively unscathed – as long as you don’t wait too long.

Here are seven scenarios that make it possible to back out of a real estate deal:

  • Before you’ve gone under contract.
  • When loss of income makes you ineligible for financing.
  • When the house appraises for less than the sale price.
  • When the inspection reveals significant problems with the house.
  • If the buyer’s house can’t sell, the seller can use “kick-out” clause.
  • If you've worked in a "coronavirus contingency."
  • When you're willing to forego some of your deposit to split amicably.

Loss of Income Makes You Ineligible for Financing

If you’re one of the millions of Americans who find themselves suddenly without work during the pandemic, getting a new mortgage won’t feel like the best idea, and your lender will agree with you.

If you’ve lost a job since you were preapproved for a mortgage and are now in the underwriting process to be approved for the loan, you are required to report the loss of employment, and the lender will almost certainly decline the loan for now.

Because financing issues are a major hurdle in a real estate transaction normally, this is a common place where deals fall through.

With 6.6 million Americans filing for unemployment in the last week of March, according to the U.S. Department of Labor, this isn’t something you could have predicted before the pandemic. Debbas notes that the mortgage lending industry had billions of dollars of loan commitment letters throughout the country that, thanks to the explosion in unemployment and other economic woes, are now worth nothing.

You’ll simply want to wait to start shopping for a home again until you’ve regained stable employment and recouped any loss of savings you may have between jobs.



Inspection and Appraisal Issues

Many home purchase contracts include the contingency that the buyer (and lender) must be satisfied with the inspection and appraisal, the results of which could lead to further negotiations.

It's possible for a property to appraise for lower than the agreed-upon sale price due to bidding wars or a seller's elevated asking price. When that happens, the buyer and seller must come to an agreement on how to proceed: Either the buyer pays more out of pocket or the seller agrees to come down in price. If no agreement can be reached, the buyer will choose to walk away from the deal.

In the pandemic, some lenders are changing their policies for appraisals. Wells Fargo, for example, is not having appraisers go inside the property to maintain physical distancing, using only an exterior inspection and property information through public record and online to complete the appraisal.

It’s unclear if this makes appraisals more lenient or strict, but it may lead to issues down the line. “I can’t imagine how one does an appraisal without an interior inspection, because the condition of the property (interior) makes all the difference in the world,” says Annemarie Stephens, associate broker with Coldwell Banker Residential Brokerage in the District of Columbia.

Similarly, a home inspection that reveals more issues than anticipated could leave the buyer less than excited to call the place home. If you’re not comfortable paying for major changes, or if the seller is unwilling to make repairs prior to closing, you can walk away from the deal.

Stephens says she’s still seeing home inspectors enter the property, but they’re conducting the inspection solo – the buyer or real estate agents that would normally attend as well are asked not to attend, and questions can be fielded by phone or email afterward.

'Kick-Out' Clause

It’s common for a real estate contract to guarantee the sale, contingent on the buyer’s ability to sell his or her current home or even the seller's ability to find a new one. As the coronavirus pandemic continues, many may struggle to find the right home or buyer in the current housing market.

For health purposes, a seller that has an alternate place to stay while her house is on the market also reduces the chances of contracting the virus from anyone who enters the home. “Most of the listing agents are trying to strongly advocate for their sellers to vacate the house already,” says Kristin Winter, a real estate broker with Live West Realty in Boulder, Colorado.

For protection in such conditions, the other party can protect his or her best interests with a "kick-out" clause. Typically used when the buyer must sell an existing home before purchasing another, this clause allows the seller to continue showing the home while the buyer's home is listed. If the seller receives a better offer, the original contract can be terminated.

Coronavirus Contingency

To more directly address the COVID-19 pandemic in contracts, buyers are now incorporating what many are referring to as a “coronavirus contingency,” which allows a bit more leeway should the pandemic interfere with a home purchase.

In some cases, the contingency is focused on funding – if the bank can no longer fund your loan solely due to the pandemic, the contingency would allow you to get your deposit back, Debbas says.

Debbas adds that these contingencies are going into every real estate deal he’s working on now – even in a case where the seller is the developer of a building under construction. “Developers never agree to contingencies, in good times or bad, and the developer agreed to this contingency,” Debbas says.

Stephens says she hasn’t had to incorporate a coronavirus contingency yet, but her colleagues who are aim to “give the buyer a little bit more leniency if they want to walk away.” In Winter’s experience, the clauses make it easier to flex the closing date or key exchange in the event of stricter government mandates or if someone becomes ill and can’t move immediately.

Work out with your real estate agent or attorney the best phrasing and options to include in a coronavirus contingency.

Early Exit

When backing out of a real estate deal, the worst thing you can do is wait. The second it feels wrong, you should let your agent know.

As quarantines and stay-at-home orders have ramped up in the last couple weeks and concern for future income, savings and investments grows among many Americans, Winter says she’s seen deals that have just gone under contract fall out of escrow before any aspect of the due diligence process takes place.

Debbas says homebuyers he represents that are choosing to back out of the deal entirely are in some cases “forfeiting 50% of the deposit (or) 75%, just to have an amicable solution.”

The buyer tends to have more options to terminate the deal throughout the contract period than the seller, as the contract typically includes easy exit points for the buyer if adequate financing is no longer available or costs become greater than the buyer is willing to take on.

But for the seller, backing out of a deal too late in the game can be considered breach of contract, and the buyer can decide to sue the seller if he decides not to move forward. Sellers on the fence about moving in the midst of the pandemic should try to make a final decision before going under contract with a buyer.

Updated on April 7, 2020: This story was previously published at an earlier date and has been updated with new information.

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