Signing a home sales contract is not the end-game in real estate, it is just the beginning of a settlement process that comes with built-in ways for a buyer to get out of the deal and financial hazards for sellers if they do. “Most real estate contracts are structured around contingencies,” said Tad Lunger, a real estate attorney with Arlington-based Bean, Kinney & Korman P.C.
From the time a buyer puts down a deposit until the deed is filed after the deal closes, there are ways to get out of a contract.
When a deal falls through, however, buyers risk losing their deposit or earnest money — though many times they can get their funds returned. Sellers can lose too — they can rack up additional payments and fees and, while the house is under contract, miss other potential new buyers. If a buyer pulls out without just cause, or does not use a contract contingency, a seller may not only feel entitled to keep their deposit but could sue for damages.
One of the first buyer outs comes during the few days allowed for homeowner association document review. “In Virginia a buyer can back out for any reason during that time,” Lunger said.
The reason for canceling does not have to have anything to do with the HOA documents. The association financial reports should be carefully read, however, because they can include “condo and HOA packages disclosing any special assessments or litigation that may be pending as well as the financial status of the associations,” said Elizabeth Lucchesi, a realtor with McEnearney Associates in Alexandria.
Most standard real estate contracts allow buyers to terminate a contract, for any reason, using the home inspection contingency. “Even if the house is perfect, if there is a modicum of buyers’ remorse, home inspection can allow for an out,” Lucchesi said.
Financing and appraisal issues can also end a contract, sometimes even when a buyer wants to move forward. If a buyer cannot qualify for a loan, the financing contingency kicks in and the deal dies. A low appraisal can doom a mortgage and end the deal unless both sides agree to adjust the sales price.
“If the third party opinion of value is less than the contract price, then the buyer can negotiate out of the sale,” Lucchesi said. “If the buyer has gone through home inspection … appraisal, and that negotiation, the financing contingency still needs to be removed. The final underwriter makes this call on value and conditions of financing.”
Buyers usually can get out of a settlement if they are willing to pay the consequences, Lunger said, but when sellers change their minds, it can be very difficult to get out of a deal. He has seen cases where sellers refuse to show up at closing, leaving buyers to decide if they can stomach litigation to force a sale.
Most escape clauses for sellers, such as contingencies to sell only if they find and purchase a home, are written as additions to the contract.
“An attorney can be consulted any time along the way, just to make sure the intentions are best being represented,” Lucchesi said. “It gets really tricky at the end, once we are moving toward settlement. Additionally, if the settlement date has arrived and the lender cannot perform, the attorney should be consulted”
Even after settlement, real estate contracts can be broken, especially if something is wrong with the title. “That’s why people need to pay attention to their title insurance,” Lunger said.
