Terminating A Real Estate Contract

The real estate market is always in a state of change.  Whether it is a buyer’s market or a seller’s market there are times when one party to the transaction wants to cancel it.  Up until the closing paperwork has been signed there is always the ability for one party to walk away from the transaction.  Whether the walking away can be legally done within the terms of the contract is another story.  This article looks at how buyers and sellers can terminate a real estate contract.

Buyer Termination Within the Terms of the Real Estate Contract

The buyer in a real estate contract usually has more options that allow them to terminate than the seller does.  Depending on how the contract is written the buyer can terminate during the inspection period, due to a low appraisal, inability to get insurance on the property, and the inability to get financing.  Those situations do not usually result in an automatic termination though (depending on the contract language).  Instead the buyer needs to take active steps to sign a release of contract and then send over to the seller for their signature.  The contract release basically provides that both the buyer and the seller agree to terminate the contract and go their separate ways.  

The contract release will usually contain terms as to how the earnest money should be dealt with.  Typically if a buyer is terminating the contract due to a contingency (inspection, insurance, appraisal, financing) then they should get their earnest money back as contracts to buy real estate typically provide that the buyer will get their earnest money back in those cases.  The seller still needs to sign the contract release providing for that.  If the seller refuses to sign the release then a court decision will be needed in order to get the contract terminated and determine who gets the earnest money (or as per state law).

State laws can vary.  In Ohio for example the law states that in the event there is no agreement between the buyer and the seller as to how the earnest money should be distributed the buyer can get their earnest money back after two years and no court proceedings having been filed.  The buyer must ask whoever is holding the earnest money (seller’s/buyer’s broker or title company) to send the money back to them.  As discussed below when the buyer or seller does not want to sign the release or neither agree how to release the earnest money both should be speaking with their own attorney as to their rights.

Buyer Termination Outside of the Terms of the Real Estate Contract

If the buyer no longer has the contingencies of inspection, insurance, appraisal or financing available to them and they no longer want to buy the home or investment real estate the situation is more complicated.  The buyer can negotiate with the seller and ask for release of the contract.  In most cases the seller is not likely to agree to the release without some sort of compensation.   The buyer can offer to turn over all or some of the earnest money to the seller in hopes the seller agrees to release the contract.

If the seller refuses to sign the contract release the buyer can elect not to proceed to closing with a caveat though.  The buyer does subject themselves to legal liability though in that the seller can sue the buyer for breach of contract.  Absent signatures from both the buyer and the seller upon closing a home or real estate investment transfer cannot take place.  While most courts will not force a buyer to buy something they do not want they can and will force the buyer to pay damages to the seller.  Those damages can include the loss of time for the seller while the home was not on the market, any loss in value of the home, moving expenses of the seller, as well as impose punitive damages against the buyer to discourage such future behavior.

It is in the buyer’s best interest to try and resolve out of court their desire to no longer buy a particular home or investment real estate when no contingencies are available.  Lawsuits are expensive for both parties and can take a long time before a decision is made.  If a buyer wants terminate their purchase, offering to pay the seller for the release may be a more economical way to stop the deal.

Seller Termination of Real Estate Contract

Sellers usually have fewer options to get out of the sale of their home or investment real estate.  Prior to even accepting an offer the seller can request that the listing agreement with their real estate agent be terminated.  Real estate listing contracts are required to be set for a specific period of time.  The seller can ask their agent if they will terminate the listing contract before any offers have been accepted.  Many agents through their broker will allow the early termination of a listing contract as it is not in their interest to try and keep a contract open where the seller is not interested in selling.

If the listing agent or their broker refuses to terminate the listing agreement the seller can request that the listing be removed from the Multiple Listing Service (MLS) and the home no longer be marketed for sale.  If the seller’s goal though is to list the home for sale with another agent they should wait until the current listing agreement is terminated in writing or expires.  Otherwise the listing broker could demand they be paid a commission through the terms of their listing agreement even though another agent sold the property.

Once in contract with a buyer the seller’s options are very limited to terminate the buyer’s contract to purchase their home or investment real estate.  The seller refusing to cooperate with the buyer to allow them to inspect or appraise the home could cause the sale to stop, but also may result in the seller being subject to legal proceedings.  Similarly if a seller refuses to close the buyer can sue the seller for breach of contract.

It is in the seller’s interest to terminate early as possible and offer some compensation to the buyer.  Compensating the buyer for their expenses related to performing inspections and appraisals and providing some extra money to walk away could save on much larger legal bills down the line.  Just as courts are unlikely to force a buyer to buy a home they don’t want they are also unlikely to force a seller to sell a home they don’t want to sell.  Courts will though order the sellers to pay the buyers expenses and pay punitive damages as well.  Lawsuits are very expensive and stressful to boot.

Consult an Attorney

In any situation where the buyer or the seller are disagreeing about signing a release of contract agreement or where one side expects to terminate the contract when they don’t have a right to do so, an attorney should be consulted.  As mentioned above, lawsuits are expensive.  The money spent on an attorney and paying some reasonable compensation to the party who will be negatively impacted by the termination of the real estate contract will mean savings down the line by not having to spend money to defend a lawsuit.  An expert attorney will guide the buyer/seller as to all their rights and options available to them.

Final Thoughts

Whatever the reason a buyer or seller has for terminating their real estate contract they need to be doing so within the terms of the contract in order to avoid lawsuits.  Terminating a real estate contract where no contingencies are available can result in an expensive lawsuit.  Both buyers and sellers should be consulting with their own attorney to make sure they are proceeding correctly.

Additional Resources

• Common Real Estate Contract Contingencies - Learn about some of the common real estate contingencies and how they protect the buyer and seller.
• Why Waiving A Home Inspection Can Cost You - Waiving a home inspection to get a competitive advantage can cost a homeowner more than in the end.
• The Importance of an Appraisal - Learn about the appraisal process from an appraiser and how they can protect both the home buyer and seller.

About the author: The above article “Terminating A Real Estate Contract” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.