Even though this isn’t an ideal situation, every Purchaser and Seller in the Charlottesville area has to be prepared for a contract being released, or cancelled, at any stage of the process.
It’s important for either side to go over the contract with their Solutions agent to understand the details before it’s signed and, in particular, to recognize the points at which the contract can be cancelled without penalty.
As stated on the first page of any VAR real estate contract, once signed by both parties, it’s legally binding. While contracts vary from one jurisdiction to another and each one is individually negotiated, many have contingencies that allow either party to cancel under specific circumstances. Neither side, however, can just say “I changed my mind” without facing some consequences.
Purchasers and Contracts
As a Purchaser, you typically provide 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 contract is legitimately cancelled.
If you opt not to buy a house without meeting the terms of the contract, you risk losing your deposit. Your contract, however, will usually include contingencies that must be met by a specific date. If any contingencies aren’t satisfied, your deposit should be returned.
Some common contingencies include:
- A specified period of time to review condominium or homeowner association documents – typically 72 hours.
- A satisfactory home inspection – the period to be stated in the contract.
- An appraisal — a lender won’t provide financing above the appraised value of the home.
- Financing — if you can’t get a loan approved, your deposit will be returned.
- A title survey.
Normally, both parties negotiate any issues that come up during the home inspection or renegotiate the deal if the appraisal comes up short.
Some Purchasers use the home inspection or document review as a way of getting out of a contract if they’ve changed their minds, but it’s far better to wait to sign a contract until you are absolutely certain you want the home and can afford it.
If you want out of a real estate transaction and don’t have any contingencies available, you can breach the contract. Once you do so, however, you’re likely to lose your deposit, along with the 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.
Some real estate contracts have a “liquidated damages” clause that states the maximum the Seller can keep if the Purchasers breach the contract. The Sellers also have the option of suing for “specific performance,” which means that a court could decide that the Purchasers must do what they promised in the contract. For example, if the signed contract said you would purchase the property for $300,000, then a court could order you to pay that amount to the Seller. These types of lawsuits are extremely rare because most parties negotiate a settlement or the Sellers find another Purchaser for the property.
Sellers and Contracts
If you’re a Seller and you’ve changed your mind about selling your house to a particular Purchaser — or selling at all — you may have an out, depending on how the contract was negotiated.
Some real estate contracts are written with a kick-out clause (we just discussed this in a recent blog) that allows you to accept a better offer if one comes in during a specified time period. If you don’t have a kick-out clause and you’ve signed a contract with a Purchaser, however, you run the danger of being sued by the Purchasers if you decide not to sell your home.
Purchasers and Sellers should rely on their Solutions agent to keep their deal together and to meet all the contingency deadlines to avoid a lawsuit filed by either side. As always, if needed, we will look to the advice of our closing attorney.
