How Do I Cancel a Home Purchase Offer? Cold Feet

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Gianna in MI: Hi Brian, After two years of dreaming about buying my first home, I have cold feet now that my offer has been accepted. It seemed like it was too good to be true. I’ve made four other offers over the past year, and this is the first that was accepted. Not only was it accepted, but I made the offer in the morning, and it was accepted the same afternoon. It’s obvious to me that the seller is desperate. That’s probably why the price was a little below the market average. Yeah, I’ve been studying the market for a while and knew what houses were selling for. In my eagerness to buy my first home, I made a full-price offer with the only continency being that my mortgage was approved. I didn’t even include an inspection contingency. Now I have buyer’s regret. In a few short weeks, the market has gotten much softer in this neighborhood and I’m not even sure the house will appraise for my purchase offer. I’m thinking this could be my way to get out of the purchase agreement so that I can wait a few more months until prices come down further. What do you think?

Answer: Hello Gianna. Your question is very timely as the residential market is transitioning away from being a seller’s market to being a more balanced market. While it is not yet a buyer’s market, buyers are in a much better place than they were a few short months ago. I’m almost certain that your biggest concern is about what will happen with your earnest money if you back out of the deal. It does sound like the appraisal is key to answering that question. Let’s look at what is probably going on here.

As the buyer, you submit an earnest money deposit when you make an offer on a home. The deposit is credited toward your down payment or returned to you if the real estate contract is legitimately canceled. If you want to get out of a real estate contract without meeting the terms, you risk losing your earnest money. Getting out of the signed contract and having your earnest money returned to you is typically only possible if the contingencies are not met. I’ll get into some common contingencies in a moment. Gianna, if I understand you correctly, the only contingency that you have is your loan approval which is based on the appraisal. I think that is a mistake in this evolving market. But if that is where you are at and you really don’t want to buy the home, there are only two suggestions that I have for you. First, if the market in your area really is slumping, postpone the appraisal for as long as you can. The more prices slump, the more likely the house will not appraise for the amount of your purchase offer. However, you said the house was listed slightly below market value. That could mean that prices will have to fall quite a way before the house appraises below your purchase offer. My only other suggestion is that you have a real estate attorney go over your purchase offer with a fine-tooth comb looking for other possible loopholes. With that said, here are a few other thoughts for people navigating today’s evolving real estate market.

The best time to think about canceling a purchase agreement is when you sign an agreement. Before you sign legal documents such as these, ask how you can cancel if things don’t work out the way you hope, or if you change your mind. If you can’t find a satisfactory answer, or you can’t figure it out yourself by reading the cancellation clauses, then don’t sign until you have a lawyer review it and advise you. Here is part of what you should know about canceling purchase agreements.

  • Ask your agent or lawyer to point out the cancellation clauses. Other than the appraisal, inspection clauses are the most common reason to cancel a home purchase. In some states, all inspections are completed upfront, and once a purchase offer is signed, the offer is binding. In other states, inspections take place after the offer is signed and provide for the return of the buyer’s earnest money if the offer is canceled due to an inspection.
  • The appraisal contingency and financing contingency are related but not the same. The appraisal contingency says that your lender will not finance the loan if the market value of the house is less than the loan. In the seller’s market, some buyers were paying a bigger down payment so that the loan was less than the market value even when the appraisal came in below market value. That is not wise in today’s evolving market. If prices are going down, don’t pay more than the house is worth. The financing contingency is dependent on your lender granting final approval of the mortgage. Even when buyers are pre-approved, circumstances can change in a few short weeks that result in final approval being denied. For that reason (and others), you want separate appraisal and financing contingencies in your purchase offer.
  • A home sale contingency doesn’t apply to first-time buyers but is a typical dilemma if you have to sell your current home before you can purchase another home. You don’t want two mortgage payments. And if you’re like most Americans, a sizable percentage of your net worth is probably tied up in your existing home and you can’t unlock that until you sell your existing home first. This common situation is the reason home sale contingencies exist.
  • Time to have a title survey conducted is another possible contingency.
  • You can also have a contingency for a specified period of time to review condominium or homeowner association documents.
  • Federal law gives buyers 10 days to inspect for lead paint. However, most homes built after 1978 do not contain lead-based paint.

Those are only the common contingency clauses. Your specific situation might require something different and unique. Although there are many laws covering real estate contracts, these are still contracts. You can negotiate or include in your purchase offer almost any contingency.

Additionally, if you want out of a real estate contract and don’t have any contingencies available, you can breach the contract. However, once you do so, you are likely to lose your earnest money along with any money you spent on an appraisal, a home inspection, and a title survey. The seller could also decide to sue you for breach of contract. The seller might have the option of suing for “specific performance,” which means that a court could decide that the buyer must do what they promised in the contract.

Gianna, this might be a longer answer than you wanted but contingencies are again becoming a common part of purchase offers. It’s time for buyers to have a detailed conversation with agents about what are reasonable contingencies to include in purchase offers.

What are your thoughts about contingency clauses in today’s changing real estate market? Please leave a comment.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

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