When Can You Terminate a Real Estate Contract?

The process of purchasing a home can be lengthy, allowing buyers like you to experience any number of motivations to terminate a real estate contract. Perhaps you have found a home you would prefer over this one, have encountered a failed financing effort, have discovered faults with the structure, or have received an unexpected job offer that, if accepted, would take you out of the area.

The challenge you will face now is that the moment you signed the purchase agreement for this home, you entered into a binding legal contract with the homeowner.

Conversely, if you’re the homeowner, you may wish to withdraw from an offer you have accepted on your property.

Either way, there’s no easy solution. No matter the root cause of your desire to withdraw, it will cost you dearly if you decide to buy your way out of your contract.

Regarding Your Earnest Money Deposit

 If you are a buyer, and you have signed the purchase agreement, you have almost certainly put an earnest money deposit on the home. This amount is meant to indicate your level of commitment to buying the home and assures the buyer that you have the necessary capital required to close the deal.

Upon the acceptance of your offer, you and your agent will have been given an agreement that includes the agreed-upon price of the home, the full mortgage amount, and the expected date on which the deal should close.

Additionally, it is common for real estate contracts to include contingencies that allow either the buyer or the seller to change their minds and back out of the deal. In the event of such a contingency, the seller is permitted to reclaim their earnest money deposit.

What should be clear, though, is that barring a contingency event, you will have to work through the legal challenges incurred by your actions.

Common Reasons Real Estate Deals Collapse

The Buyer Loses Their Income

If you’re the buyer and you lose your income, you will no longer be able to qualify for a mortgage. If your mortgage is denied for this or any other reason, you will be forced to withdraw from your contract.

Ideally, your agreement will contain a financing contingency that permits you to walk away due to failed financing. Still, this clause only holds for a brief period of time; once this window has closed, you can’t reclaim your earnest money deposit.

Appraisal Gaps

An appraisal gap arises anytime the appraisal value reveals that the agreed-upon purchase price is too far above fair market value. In some markets, this gap may be irrelevant to the buyer, who will choose to waive this clause.

More often, though, a buyer will invoke the appraisal contingency and withdraw their offer.

The Buyer’s Existing Home Does Not Sell

If you’re working to sell your home in order to purchase this new property, you may encounter a major setback if you aren’t able to do so in time because you likely won’t be able to afford your new mortgage.

Even if you can afford to take on a second mortgage, you may be reluctant to accept the financial liability of doing so.

While your real estate agent will have made sure a contingency has been included in the contract to protect you financially in just this situation, the seller will begin to work immediately to replace your agreement with one from a prepared buyer.

Home Inspection Issue 

A significant problem uncovered by a home inspection will permit the buyer to withdraw, along with their full earnest money deposit. This can be invalidated once the agreed-upon time for this contingency has passed.

When the Seller is Deceptive

A seller may withhold vital information, lie about repairs having been made, or misrepresent the age of the roof, for example. In the unfortunate event that you do encounter a bad-faith seller, you will have legal grounds to terminate your contract and walk away with your entire earnest deposit in hand.

When the Seller Makes a Mistake 

Without any ill intent, a seller may make a serious mistake either in representation or process. The buyer then has the ability to withdraw from the deal, alter it, or work with the seller if they are able to fix the issue promptly. The seller may also offer to place money into the escrow account to pay for any necessary repairs, which can permit the deal to proceed without delay. 

Trouble with the Title

When a title search is conducted, you may become aware that the buyer has liens or similar claims on the title that prevents them from legally selling the home. Unless this roadblock can be removed by the seller fixing the issue, you will encounter no trouble in withdrawing from the agreement.

The Process of Cancelling the Contract

Ideally, all impediments to the deal will be removed, and the home’s status will progress from contingent to pending. When that cannot be achieved, though, it is time to cancel the contract.

Your agent will walk you through the process of cancelling the deal, which is specific to the laws here in Tennessee. While it may take a bit of time to complete the cancellation, working with an agent guarantees that you will regain your earnest money as quickly as possible under the circumstances.

Unfortunately, if your reason for withdrawing from your contract isn’t covered by a contingency agreement, you will lose your deposit. Because this amount can be up to a whopping 10% of the purchase price, losing it may make it impossible to purchase a different home until you have saved up supplemental funds.

The good news is that such an eventuality is rather uncommon. Because most “good” reasons for exiting the contract will be covered by contingencies, you should try not to worry about losing your deposit.

Your agent will be by your side at each stage of your home-buying process. Ask questions, read contracts, prepare your finances, and moving day will be upon you in a flash!