Can the Buyer Back Out of a Real Estate Contract?
A real estate contract is legally binding, and the general expectation is that both buyer and seller will each fulfill their ends of the deal. However, there are clauses that allow buyers to back out of a real estate contract under certain conditions. It’s always a good idea for both buyer and seller to consult with a real estate attorney when dealing with this sort of issue, to avoid the loss of deposit money, or potentially significantly more.
Typically, the buyer has many more options for backing out of the contract than the seller in the California Association of Realtors form Residential Purchase Agreement (“RPA”), the home sale contract used in the overwhelming majority of home resales. One common contingency allows the buyer to walk away from the deal if the property fails inspection. Another states that the transaction will depend upon the buyer obtaining adequate financing for the purchase. As long as these contingencies are included in the contract – they are in the RPA boilerplate, but can be removed through negotiation or if the buyer wants to strengthen an offer – there should be no repercussions if the buyer needs to back out of the contract for those reasons. There are many other contingencies that may be included in a real estate contract; the important thing is for buyers to be aware of possible pitfalls of these clauses. All of the contingencies come with the caveat that under the RPA, they must be exercised in “good faith.” Consulting with our team of real estate attorneys can keep buyers informed of the limitations of the contract as well as their rights.
In some cases, a buyer may try to back out of the contract for reasons clearly not allowed. For example, they may think they could get a better deal elsewhere, or they might decide they prefer another property. In these cases, sellers can sue in theory to force the sale to move forward, though such actions are extremely rare and usually not successful. Typically the contract provides for liquidated damages, which usually is defined to be the amount of the deposit, IF the liquidated damages provision is initialed in the RPA. In California, non-refundable deposits offered as earnest money are typically not valid, but the contract typically describes the seller’s retention of the deposit as “liquidated damages” to enforce this policy. This language should be included in the contract before either party signs, and is part of the RPA if elected by the parties to the sale.
Since these cases can often involve a lot of time, stress, and money, the best course of action is to consult a real estate attorney if you have questions about specific provisions of your real estate contract. The attorney can advise the buyer of his rights before a conflict occurs and offer solutions that will best protect the buyer under the law.