Can a Seller Back Out of a Signed Contract?

Backing out of a signed contract is easier said than done for sellers. In real estate, sellers generally can’t back out of a signed purchase agreement without risking significant legal and financial consequences. Contract law heavily favors buyers, granting them multiple outs through contingencies, while holding sellers firmly to their promise to sell.

Once a seller signs, they’re on a one-way journey to closing, barring extreme circumstances or buyer default. This makes it critical for sellers to fully understand the contract before committing—because once it’s signed, there’s little room to change course.

What if the Buyer Doesn't Send Earnest Money?

Failure to submit EMD is rarely (if ever) grounds for cancellation due to non-performance.

Watch this video for more on the topic. EMD is not Consideration

Understanding the Seller's Rights:

Once a contract is signed, it is considered legally binding. However, there are situations where a seller may be able to back out with few or no consequences, including:

1. Contingencies: Contracts often include written in contingencies allowing either party to terminate the agreement under specific conditions. Examples include inspection or appraisal contingencies, or the failure to meet certain deadlines. If specific contingencies in the contract are not met, such as the seller's inability to find a new home within a specified timeframe, they may also have the right to terminate the agreement.

2. Attorney Review: An attorney review period may be in the terms and conditions, during which the buyer or seller can back out of a signed agreement. Usually a few days long, the period gives either party the chance to back out of the contract because their lawyer notices a problem.

3. Breach of Contract: If the buyer fails to fulfill obligations outlined in the contract, the seller may have the right to terminate the agreement. This includes a buyer not complying with terms, failing to correct the breach within the cure period, or failing to secure financing.

4. Mutual Agreement: Both parties can agree to mutually terminate the contract by signing a release or cancellation agreement, regardless of the reason.

5. Fraud or Misrepresentation: Sellers may be able to back out if the buyer engaged in fraudulent activities or provided false information that materially affects the transaction.

Consequences for Buyers:

A sympathetic buyer who understands the seller’s situation may be willing to let the seller out of the deal without penalty. However, there are several consequences that can impact the buyer when a seller backs out:

1. Legal Recourse: Buyers may have legal options to seek remedies, such as filing a lawsuit to enforce the contract or pursuing monetary damages.

2. Financial Losses: Buyers may lose money spent on inspections, appraisals, or other costs associated with the purchase that cannot be recovered. If the buyer had to pass on other properties or opportunities during the initial purchase, they may miss out on those alternatives when the contract is broken. These can be a significant source of stress and disappointment.

3. Delayed Timeline: The buyer's home buying process may experience significant delays, resulting in a new property search or renegotiation of financing terms.

Consequences for Sellers:

1. Suit for specific performance: The buyer may sue the seller in hopes of obtaining a court order requiring the seller, as a breaching party, to go forward with the agreement and complete the sale. If such an award is granted, the seller would be paid as agreed and title transferred to the buyer, even against the seller’s wishes. This legal process can come with massive legal expenses and potential consequences for the seller.

2. Damages: A buyer who feels subjected to unreasonable and unwarranted expenses as a result of a seller backing out of a contract may also sue for damages. Monetary damages may be awarded for a number of commonly incurred costs including, but not limited to, storage costs, temporary housing costs, lost deposits, legal fees, and more.

3. Listing Agent Sues for Compensation: If a seller hired a listing agent and suddenly or unexpectedly backs out of a contract, the listing agent may have grounds to sue for lost commissions, marketing fees, or other expenses related to the failed sale.

Seeking Professional Advice:

It can be challenging to navigate the complexities of real estate contracts and the consequences of a seller backing out. It is advisable for buyers to consult with a real estate attorney or professional experienced in local laws and regulations to understand their rights and options. Real estate contract laws can vary from state to state, so be sure to check state laws before walking away.