For buyers: How to cancel a real estate purchase agreement

For many first-time real estate investors, purchasing their first property will be the first or second time they’ll make a large transaction. The number of risks involved in real estate investing can fill our hearts with doubt. For the doubters, you’re in luck. Standard real estate purchase contracts are written to favor the buyer. There are several stages to the real estate purchase process:

1. Buyer sends an offer (or a counter-offer), along with an earnest money check (usually $1,000)
2. Seller accepts offer
3. Buyer’s agent deposits the earnest money check into an escrow account
4. Buyer has a certain period of time (usually 10 days) to conduct an inspection of the property, and either accept the property as-is, or request that the seller perform repairs
5. Buyer has a certain period of time to obtain a loan commitment from a lender
6. If conditions (4) and (5) are satisfied, the property goes to closing, usually 30 days out.

Conditions (4) and (5) are the keys to a buyer’s salvation when getting out of a purchase contract. Let’s outline both of these.

The inspection contingency

Your realtor typically provides a standard form purchase contract with a home inspection contingency. During this time you’ll have the opportunity to send in a home inspector, who will produce a detailed report about any needed repairs and send it to you. When you receive this report, you typically have three options: (a) accept the property as-is, without faults, (b) request that the seller make repairs, or (c) reject the property due to “latent defects.” The last one is the key — there are always latent defects in every house, and it’s the inspector’s job to find them. No matter how much the seller discloses beforehand, some problems are always going to be missed. If you need to get out of a real estate purchase contract, you’ll be able to use the inspection contingency to terminate the contract and get your earnest money back. Just be careful not to wait too long to do it — in some contracts, the inspection contingency expires automatically after a certain number of days if you don’t send a response to the seller, in writing.

The loan commitment

Standard purchase contracts typically protect the buyer in situations where the bank is unable to finance the property. Generally, the only thing the contract requires the buyer to do is to make a written application to the bank within a certain number of days. After that, the contract is conditioned on the bank providing financing — that is, the buyer can’t lose the earnest money deposit simply because the bank can’t lend to the buyer. How can we use this to get out of a real estate purchase contract? This depends on what kind of relationship you have with your mortgage loan officer. If, for any reason, the bank didn’t receive the documentation it requires to close the loan, or you’re unable to sign papers, the contract will automatically cancel. The bank certainly isn’t going to loan to an unwilling buyer.

Conclusion

Most realtors are very familiar with these two “back door” provisions in real estate purchase contracts, and because of this, they’re not surprised when a buyer expresses a desire to get out of a contract. Oftentimes, realtors and sellers don’t even observe the procedure and will simply cancel a contract at the buyer’s request. If you do find yourself in need of cancelling a real estate contract, be aware of the two major ways to get out of it, and be mindful of the deadlines for doing so.