Can a Seller Back Out of a Contract?

The last thing you want to hear, as a seller or buyer, is that your deal fell through. While, yes, it is possible for a seller to back out of a contract in certain scenarios, doing so is not without consequence. Unlike when buying a home, sellers aren’t just forfeiting their earnest money deposit. They can sometimes be legally forced to close or sued for financial damages for trying to get out of a contract.

When can a seller back out of a home sale?

Once a written purchase agreement is signed, it is a legally binding document. This means a seller can’t easily back out without justification. However, there are specific circumstances where cancellation may be possible:

1. The contract includes contingencies benefiting the seller

Most real estate contracts include contingencies — conditions that must be met for the agreement to move forward. If the seller included their own contingencies, such as a clause stating the sale is contingent upon their ability to find a new home, they can back out if those conditions are not met.

2. Both parties agree to cancel the contract

Contracts can be canceled by mutual agreement. If the buyer is willing to release the seller from the agreement — for example, they also wish to step away from the purchase — it may be possible to terminate without significant consequences.

3. The buyer fails to meet their obligations

Suppose the buyer fails to adhere to the terms of the contract, such as missing escrow deadlines, failing to provide required documentation, or being unable to secure financing. In that case, the seller may have grounds to cancel the agreement.

4. The seller doesn’t want to re-negotiate based on the buyer’s contingencies

Buyers often put multiple contingencies in their offer for unforeseen circumstances surrounding the property that allow them to cancel the deal. Here are a few of the most common ones that sellers may leverage as an opportunity to back out of a deal. 

Home inspection contingency: In this case, the buyer's inspection comes back with some red flags related to home repairs or issues. If the seller refuses to either pay for some or all repairs or offer a credit so the buyer can complete the repairs, the deal may be canceled.

Financing contingency: A financing contingency can also derail a deal; this occurs when a buyer is unable to secure the financing they need to purchase the home. 

Appraisal contingency: With an appraisal contingency, financing could be denied if the appraisal on the home comes back lower than the loan amount and the buyer doesn't want to or can’t make the difference in cash. Note that cash buyers will sometimes request an appraisal for their own peace of mind, and they can back out if they’re not satisfied with the appraisal report, assuming they have a contingency in their contract.

5. A legal loophole or exception applies

Though rare, legal loopholes may offer a way out. For example, the seller may be able to cancel the contract if fraud or misrepresentation occurs during the transaction negotiations. This would typically require the guidance of a real estate attorney.

Consequences of backing out of a purchase agreement

Backing out of a sale can have significant repercussions, both financial and legal. Sellers must weigh these carefully before making a decision:

1. Financial penalties

If a seller breaks the contract without legal justification or the buyer’s consent, the buyer may seek compensation. This could mean covering the buyer’s direct costs (such as inspection fees) or facing a lawsuit for damages if the buyer relied on the sale.

2. Reputational damage

A seller backing out of a contract deal can damage their reputation in the real estate market both personally and financially. Canceled deals are featured on home listings and are public knowledge; this can repel future offers on the same property. Likewise, future buyers will also be hesitant to engage with a seller who canceled a prior agreement. 

3. Losing earnest money

Depending on the terms of the contract, a seller who cancels improperly may be required to return the buyer’s earnest money — and in some cases, pay additional damages.

4. Legal risks

Unjustly backing out of a contract could land the seller in legal trouble, especially if the buyer files a lawsuit to force the sale (a legal action known as “specific performance”).

How to get out of a real estate contract as a seller

If you’re considering backing out of a home sale agreement, you should start by consulting your real estate attorney and real estate agent, they can help you determine the best path forward. 

An expert real estate agent is a must-have in a situation where you may want to back out of a deal. Consider working with a Premier Agent partner who can guide you through the complexities of this situation. 

Your agent will notify the buyer and include the legal justification for canceling, if possible. If there’s no legal reason, explain your situation to the buyer and consider asking them to cancel by mutual agreement. You may also have your agent offer a financial incentive to the buyer if they’re willing to let you out of the deal.

Before cancelling a real estate contract, ask yourself these important questions:

• Is there a contingency allowing cancellation?
• Have I fully reviewed the contract terms with my real estate agent or attorney?
• Am I prepared to face potential financial and legal consequences?
• Can I explore alternatives, such as negotiating with the buyer for a mutual release from the agreement?

Advice for buyers

For buyers, a seller backing out can be an emotional and frustrating experience. If you're faced with this situation, talk to your real estate agent or attorney to understand your options. You may be entitled to compensation or, in some cases, have a legal right to enforce the agreement. Staying proactive and knowing your rights can help you feel more in control during a difficult time.

The bottom line

While a seller can back out of a contract, doing so is often complex and can come with significant consequences. Whether you’re a seller or buyer, the best path forward will always depend on the unique details of your situation. Consulting with your real estate agent or legal professional is vital to ensuring you make informed, confident decisions.

Disclaimer: Zillow, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.