This is a common question that arises during real estate transactions. Once a seller accepts an offer from a buyer, a binding contract is formed. However, there are some limited circumstances where a seller may still be able to back out of an accepted offer.
What constitutes an accepted offer?
For an offer to be considered formally accepted, the seller must sign the purchase agreement and return a copy to the buyer. Verbal acceptance or accepting the offer over email or text is not enough to form a binding contract. The acceptance must be in writing and signed by the seller.
Once the seller has signed and returned the offer, they have accepted the buyer’s terms and a legally binding contract is formed. This contract sets out the agreed upon price, closing date, contingencies, and other terms and conditions of the sale.
Can a seller still back out after formally accepting an offer?
In most cases, no. Once the seller has communicated clear written acceptance of the buyer’s offer, both parties are legally bound by the contract.
There are very limited circumstances where a seller may still have grounds to terminate the contract after formally accepting the offer:
- The buyer materially breaches the contract – If the buyer fails to uphold their end of the contractual obligations, the seller may be able to terminate.
- There is a contingency allowing termination – The contract may contain a contingency clause that allows either party to terminate under certain conditions.
- The seller can prove fraud, duress, or mistake – If the seller can prove the contract is invalid due to fraud, duress, or mutual mistake, it may be enough grounds for termination.
- The seller receives a better offer – This is not sufficient grounds to break a contract. Sellers should not accept backup offers after going under contract.
Unless the seller can demonstrate one of these limited legal grounds for termination, they are unlikely to be successful if they attempt to back out of an accepted offer simply because they changed their mind or received a better deal.
What are the risks of backing out of an accepted offer?
Sellers face significant risks if they improperly back out of an accepted contract with a buyer simply because they want to take a different deal. These risks include:
- Breach of contract lawsuit – The buyer can sue the seller for breach of contract and damages.
- Monetary damages – The seller will likely have to pay money damages to the buyer for losses incurred.
- Specific performance lawsuit – The buyer could sue to force the seller to go through with the sale.
- Loss of credibility – The seller damages their reputation and future selling prospects.
In addition to potential legal action, the seller faces damage to their reputation and future ability to secure buyers if they back out of an accepted offer without proper grounds. Most buyers will be hesitant to make an offer on a seller who breached a previous contract.
What should a seller do if they receive a better offer?
If a seller receives a higher offer from another buyer after accepting an initial offer, they do not have the right to simply back out and take the better deal. There are more ethical options to consider:
- Disclose the new offer and see if the initial buyer will modify the contract.
- Wait to see if the initial contract falls through due to contingencies.
- Formally decline the higher offer to honor the existing contract.
- Insert a right of first refusal clause allowing the initial buyer to match new offers.
The seller should avoid unethically breaking a contract simply because a better offer came along. This maintains integrity and causes less issues in the long run.
Can a seller terminate during the inspection contingency period?
Most real estate purchase contracts include a buyer inspection contingency clause. This gives the buyer a set timeframe, usually 7-14 days, to have the home inspected and potentially back out if issues are found.
During this defined inspection contingency period, the buyer can terminate for virtually any reason as long as they give proper written notice. The seller also has the right to terminate the contract during the contingency period if they have a valid reason, such as not being willing to make repairs requested by the buyer.
Once the inspection contingency period expires, both parties usually lose their termination rights under that clause. Only general contract termination provisions applying to both parties will still apply.
What about terminating under the financing contingency?
Real estate contracts also frequently allow the buyer to terminate if they fail to secure financing within a certain timeframe. During this financing contingency period, the buyer can usually back out if they don’t get approved for a mortgage.
The seller cannot arbitrarily decide to terminate under the financing clause, however. Only the buyer has that right. The seller can only generally terminate by mutual agreement with the buyer during this time.
When does the seller need to return the buyer’s earnest money deposit?
When a real estate deal falls through, the fate of the buyer’s earnest money deposit is determined as follows:
- Buyer terminates: The deposit is usually returned to the buyer.
- Seller terminates: The deposit is usually released to the buyer.
- Mutual termination: The deposit disposition is negotiable.
The purchase contract will specify conditions under which the earnest money deposit becomes non-refundable or gets disbursed to the seller. Often the seller only keeps the deposit if the buyer breaches the contract.
Can the seller terminate if the buyer’s loan gets denied?
If the buyer fails to secure financing within the allowed time frame in the contract, the buyer has grounds to terminate under the financing contingency. The seller cannot arbitrarily terminate because they hear the buyer’s mortgage was denied, however.
The buyer must formally exercise their termination rights under the financing clause first. Otherwise the contract remains in force. The seller cannot force termination just because the buyer told them informally their financing fell through.
Can the seller cancel for home inspection repairs?
The seller is not obligated to make repairs simply because the buyer’s home inspector identified issues. The contract determines whether the seller has any duty to correct inspection findings.
If the seller does not agree to make certain repairs requested by the buyer related to the home inspection:
- The buyer can terminate if within the inspection contingency period.
- The buyer can request repairs and negotiate with the seller.
- The buyer can move forward with no repairs by the seller.
- The seller cannot unilaterally terminate just because the buyer requested unreasonable repairs.
The seller remains bound by the contract unless the buyer terminates under the inspection clause or there is mutual termination agreement.
Can the seller back out due to an appraisal contingency?
Contracts sometimes contain appraisal contingencies that allow either party to terminate if the home does not appraise for at least the offered purchase price. During this defined appraisal contingency timeframe:
- The buyer can terminate if the appraisal comes in low.
- The seller can terminate only by mutual consent with buyer.
- Neither party can arbitrarily terminate just because an appraisal was completed.
Once the appraisal contingency period expires, neither party can simply terminate based on an unsatisfactory appraisal. The contract remains binding.
Conclusion
While a seller technically can terminate an accepted offer in limited circumstances, they incur significant risk by backing out improperly. Sellers should understand their rights and obligations under the agreed contract and carefully weigh the consequences before taking any steps to terminate after accepting an offer.
Buyers also have rights, and an improper cancellation by the seller may entitle the buyer to damages or legal action. Sellers should consult an attorney before attempting to reverse course after signing a buyer’s offer to purchase.