Buying a home is rarely done with casual disregard. You’ve planned, juggled finances, worried about finding the right house, and then you finally sign a contract. But what happens if you’re now facing the decision of submitting a buyer cancellation of the purchase agreement?
In this guide, we’ll break down what you need to know about buyer cancellation of a purchase agreement. From the initial understanding of what a home purchase agreement is, to the reasons why buyers may back out, and the steps involved in cancellation. We’ll also review the legal and financial repercussions that can follow.
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Disclaimer: As a friendly reminder, this blog post is meant to be used for educational purposes, not legal advice. If you need assistance navigating the legalities of canceling a purchase agreement, HomeLight always encourages you to reach out to your own advisor.
What is a home purchase agreement?
A home purchase agreement, often referred to as a real estate contract, is a legally binding document between a buyer and seller outlining the terms of a property sale. This comprehensive document details everything from the purchase price, down payment, and financing terms to contingencies, closing dates, and any specific conditions both parties must meet before the sale can be finalized.
At its core, the agreement serves as a roadmap for the transaction, providing a clear outline of what is expected from both the buyer and seller to ensure a smooth transfer of ownership. It includes key elements such as:
- Property details: The address and legal description of the property.
- Sale price and terms: The agreed-upon price for the property and the terms of the payment, including the earnest money deposit amount and financing details.
- Closing and possession dates: When the sale will officially close and when the buyer can take possession of the property.
- Contingencies: Conditions that must be met for the sale to proceed, such as home inspections, financing approval, and the sale of the buyer’s current home.
- Signatures: Legally binding signatures from both parties, indicating agreement to the terms.
Reasons buyers back out of a purchase agreement
Buyers may decide to back out of a home purchase agreement for various reasons, including both personal circumstances and issues arising from the property itself.
Danielle Moy is a top Chicago area real estate agent with more than 16 years of experience. She says buyer’s remorse is something she’s seeing more often in the current housing market.
“That’s the main reason that I see a buyer wanting to cancel after they sign [the purchase agreement]. They have buyer’s remorse after talking to family or a lender, reevaluating their monthly payment, and then realizing it’s higher than they expected. They want to wait till the rates drop a little bit before they continue their search.” Moy adds, “We’ve seen a lot of people even back out before they drop off the earnest money.”
Here’s a quick look at common factors prompting home buyers to back out of a purchase agreement:
- Financing issues: Buyers struggling to secure a mortgage or facing unfavorable loan terms may opt to cancel the purchase.
- Home inspection findings: Discovery of significant problems during the home inspection can deter buyers, especially if repairs are costly or the seller is unwilling to address the issues.
- Cold feet: The sheer magnitude of buying a home can lead to second thoughts, causing some buyers to reconsider their decision.
- Appraisal concerns: If the property appraises for less than the offer price, it can jeopardize financing, prompting buyers to back out.
- Personal circumstances: Changes in family dynamics, or financial situations can influence a buyer’s capability or interest in proceeding.
- Loss of employment or income: A sudden job loss or reduction in income can drastically affect a buyer’s ability to finance the home, leading to cancellation.
- Unable to sell current home: Buyers contingent on the sale of their current home may need to withdraw if they cannot sell within a specified timeframe.
- Seller fails to make promised repairs: If a seller agrees to make certain repairs before closing but fails to do so, a buyer may choose to back out.
- Undisclosed defects or property issues: Discovering previously undisclosed problems with the property can lead buyers to reconsider their purchase decision.
- Unresolved title issues: Encumbrances or disputes related to the property’s title can complicate the sale, prompting buyers to cancel the agreement.
To get a better feel for what’s happening in the current market, HomeLight surveyed more than 1,000 of the nation’s top-rated real estate agents. Here is what they cited as the most common reasons buyers are canceling deals after a contract has been signed.
What is an option period?
The option period is a specified timeframe within a real estate contract during which the buyer has the exclusive right to terminate the agreement for any reason. Typically lasting from a few days to a couple of weeks, this period allows the buyer to conduct thorough due diligence on the property, including obtaining inspections and appraisals, without the risk of losing their option fee, although the fee is often non-refundable.
The key features of an option period include:
- Flexibility: The buyer can walk away from the purchase with minimal financial loss, typically forfeiting only the option fee.
- Negotiation opportunity: Based on findings during the option period, buyers can renegotiate terms or request repairs from the seller.
- Time-bound decision making: The limited duration encourages timely decision-making and progression toward closing or cancellation based on the findings.
