Here’s is a recent reader question:

“I have been looking at a house and decided I wanted to look into buying the house. I met with my Realtor and we signed a contract. Long story short, we did a home inspection and there was a lot of things that were wrong with the place. I decided now is not the right time financially for me to buy this house. I know that I am not the first person to want out of a contract but my Realtor won’t help me get out of it. She just keeps telling me that I will be sued. Can you tell me the legal way for me to get out of this purchase contract.”

My answer:

You are correct in that you are not the first to “want out” of a real estate contract. Needless to say, times are tough for agents now, so every deal counts and that maybe at the core of this problem. But in legal matters, you can not depend on the cooperation from the other side. Sure you could get lucky and have a seller “let you out” of the contract without a problem…but in this tough market, I would not depend on it.

I Want Out of My Purchase Contract…Not Enough

What home buyers need to know is that simply “wanting out” is not enough when it comes to contracts. You must have a legitimate reason for canceling a real estate contract. “I changed my mind” is not an acceptable legal reason.

Take the opposite position for a minute…it’s you selling the house. I contract to buy it…you hold it off the market for 2 months while I’m getting inspections, appraisals, and my money together. Then at the last minute, I tell you, “I changed my mind”…no legitimate reasons…just that I want out.

In a market that is falling, you must now put the house back on the market and will most likely have to lower the price to get another buyer. I cost you time and money. If there were not safeguards against this, many sellers would be harmed intentionally. For example, a home seller could contract with all the competing homes for sale in his surrounding area, leaving only his NOT under contract. Once his was sold, he could simply cancel all the other deals he tied up benefiting himself at the expense of the other sellers.

Legit Reasons For Canceling Purchase Contract

The good news for you….there are legitimate reasons for canceling a contract and they are outlined in the contract. Most state approved “Buy/Sell Real Estate Contract” has specific clauses allowing the buyer to cancel without damages or creating a cause of action. The contract in Colorado (the only one I am familiar with) allows for cancellation should the mortgage sought not be forthcoming, or the appraised value does not meet the sales price, or the inspection is unsatisfactory to name a few.

The exact mortgage clause reads like this:

“Loan Commitment. If Buyer is to pay all or part of the Purchase Price by obtaining a new loan as specified in § 4b, this contract is conditional upon Buyer obtaining a written loan commitment. This condition shall be deemed waived unless Seller receives from Buyer, no later than Loan Commitment Deadline (§ 2c), written notice of Buyer’s inability to obtain such loan commitment. If Buyer so notifies Seller, this contract shall terminate. IF SELLER DOES NOT RECEIVE WRITTEN NOTICE TO TERMINATE AND BUYER DOES NOT CLOSE, BUYER SHALL BE IN DEFAULT.”

This paragraph outlines the proper way to cancel the contract IF denied for the loan or IF the loan commitment does NOT meet the terms outlined in the financing section of the contract. This means if you put in a loan amount and interest rate in the financing section, and the approval comes back with different terms…you can cancel the deal. One could say in preparation for signing the contract a wise move would be to put in a very low rate and very high loan amount, so as to give you terms that would most likely get changed for the worse on the way to approval. That way the purchaser could trigger this clause to kill the deal. Of course, if buyers were this proactive, they’d simply put in there own contingency clauses as you’ll learn in a minute.

Cancellation in a Colorado purchase contract is also provided for if the appraisal comes in below the sales price. Here’s that language…

“Other. Buyer shall have the sole option and election to terminate this contract if the Purchase Price exceeds the Property’s valuation determined by an appraiser engaged by________(buyer or seller). The contract shall terminate by Buyer giving Seller written notice of termination and either a copy of such appraisal or written notice from lender that confirms the Property’s valuation is less than the Purchase Price, received on or before Appraisal Deadline (§ 2c). If Seller does not receive such written notice of termination on or before Appraisal Deadline (§ 2c), Buyer waives any right to terminate under this subsection.”

As you can see, those are very specific reasons to cancel and they can not be used if you are not proactive, or get the financing with the terms you applied for or the appraisal comes in low.

The cancellation clause with the most latitude for a purchaser to use to “get out of the deal” is the inspection clause and it reads like this:

“Inspection Objection Deadline. Buyer shall have the right to have inspections of the physical condition of the Property and Inclusions, at Buyer’s expense. If the physical condition of the Property or Inclusions is unsatisfactory in Buyer’s subjective discretion, Buyer shall, on or before Inspection Objection Deadline (§ 2c):

  • (1) notify Seller in writing that this contract is terminated, or
  • (2) provide Seller with a written description of any unsatisfactory physical condition which Buyer requires Seller to correct (Notice to Correct).

    • If written notice is not received by Seller on or before Inspection Objection Deadline (§ 2c), the physical condition of the Property and Inclusions shall be deemed to be satisfactory to Buyer.”

    Notice in this “built in” cancellation clause all the buyer has to do is notify the seller in writing of his termination by the proscribed deadline to kill the contract. Not all states have this kind of verbiage in their approved real estate contracts, so read your contract carefully.

    There are other clauses one can use to cancel like disclosure of lead based paint, termites, or flood zones. So don’t think just because the three above won’t help…there are not other ways to cancel.

    Add Your Own Cancellation Clauses

    A buyer can go further and add what are known as “contingency clauses” to the contract like, “This contract is contingent on review and acceptance of buyer’s attorney”. It is wise to always add another contingency clauses to your contract, so you’ll never need to rely solely on the “built in” clauses.

    If cancellation is not done according to the contract, you could lose the earnest money you put down or worse, you could get sued for more.

    Sadly, if your contract does not have a “buyer friendly” inspection clause like Colorado or you didn’t put in your own contingency clause, it’s time to get a lawyer. Have him/her review the contract and determine the best course of action and have him speak with the agent. Many legal aid offices will help in situations like this if money is a challenge.

    Lastly, reading this should remind you of the magnitude of the decision to sign a real estate purchase contract. It is not a step to be taken lightly and a mis-step can cost you dearly.

    Good Luck!

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