How to Break a Real Estate Contract (without losing your shirt)

How to Break a Real Estate Contract (without losing your shirt)

We have all worked for buyers who got into a real estate transaction with the best of intentions, only to find that it was not the right deal for them. It may be the price they are paying, it may be unanticipated expenses moving forward, it may be financing, and it may be items that were uncovered during the inspection. It could be just about anything, but in real estate it’s almost  always about the money. And let’s be honest – the biggest responsibility that a Realtor has to his client when negotiating a contract is to protect them at all legal cost, and to make sure they don’t lose their money.  

1. Protect yourself

We have all read that “cash is king” and perhaps the best way to secure a property in a hot real estate market is to make your offer the most attractive. If you have the means, cash is a great way to go. But it does not mean you should get into a contract without protecting yourself, and this is the primary reason you should hire a Buyer Broker. There are good ways to make a great offer and there are bad ways to make a great offer and the worst way is to offer cash with no contingencies. Contingencies are your safety net and if you need to break a contract that contains no contingencies, you will forfeit your deposit. In a typical transaction that may be upwards of 10% of the purchase price. Furthermore, if a buyer breaks a full priced offer with no contingencies, the Sellers Agent still gets paid. So if you have chosen to work with the Sellers Agent and they encourage this type of offer, beware!

Building Inspections are fairly typical in most real estate transactions and should really not be forfeited in an effort to make your pitch more attractive. Few if any offers are presented in this day in age without an inspection contingency, so a Seller’s Agent that suggests it may well be puffing in order to provide their Client with more attractive options. Only a foolhardy buyer leaves themselves with no recourse if there are significant defects with the home, and even if there are none, the Inspection Contingency allows you to “change your mind” without risk of forfeiting your deposit money. So long as you act within the timelines set forth in the contract – typically 21 days from a fully executed agreement – you are protected. There is no such thing as pass or fail in an inspection. It is generally to the “buyer’s sole satisfaction”.

Financing is a big safety net, but use caution if you intend to break a contract using this contingency. It is generally based upon an ability to obtain financing, which includes an appraisal. Assuming that you can use this if you have a change of heart could lead you down a dangerous path, and there is at least the potential that you could lose your deposit if you can not provide cold hard facts supporting termination based upon the Financing Contingency. You must demonstrate some event that affects your loan profile – such as losing a job or a sudden jump in interest rates – in order to ensure this as a path out. There is a reason that most Financing Contingencies allow you to state a preferred interest rate. If your agent has filled in “market rate” he has done you a disservice. Stating a specific rate (in an ever changing market) can be the difference maker if a sudden shift in interest rates now makes your loan look like a dog.  New truth in lending requirements create more bureaucracy with regard to financing, so there may be manners in which to manipulate the financing clause as a strategy to break a contract, but as a general practice this contingency should be used for what it was intended.  

2. Seek Competent Legal Counsel

Legal Counsel | Doug Mosle Real EstateBy statute real estate agents are not permitted to practice law and practice real estate in the same place and at the same time. There is good reason for this. There are numerous complexities in a real estate transaction and relying upon a real estate agent to decipher the law is a poor idea. Your attorney can help you maneuver through the legal juggernaut and if necessary help find legal precedent for termination of the contract without penalty.

The Attorney Review Clause exists so that Realtors don’t have to answer legal questions which they are not qualified as an expert to answer. This is generally a short window of 5-10 days which allow you to withdraw from the contract without penalty, or more typically renegotiate or add protective language to a contract. Examples of this may be the addition of language providing that a seller of a raw parcel of land allow the purchaser to apply for and receive a building permit for the home they wish to construct, and language that would also allow the purchaser to back out if such a permit is not granted under their terms. Contracts can be subject to approval of easements, right of ways and other encroachments upon a property, and these may provide legal precedent to break a contract without penalty. They can be contingent upon approval of a survey, which sounds harmless, but can be an open ended path out.  

If you are purchasing a condominium, there must be a clause allowing you to examine the condition of the Association. This will provide disclosures as to any special assessments that are foreseen or ongoing, as well as a disclosure of how much cash the association has on hand for capital improvements, as well as the number of owners who are delinquent in their payments to the association. If these have not been disclosed by the seller, they should be revealed by examining the condo docs and will provide the Buyer with ample opportunity to withdraw their offer if they don’t like what they see. Vermont  real estate law requires this to be a part of any contract where common areas will be conveyed as part of a real estate contract.

In addition to providing legal counsel, the buyer’s attorney is generally responsible for examining the Title of the property being searched. Most real estate contracts provide that the property will be conveyed with “clear title” that is free of defects. This means exactly what it sounds like, and there may be precedent to terminate a contract if there is some cloud on the Title and the Seller is unwilling or unable to clear it.

Finally, utilizing a local attorney is essential to ensuring success, and more importantly protecting you in the event that you need to terminate. While it may seem like a good idea to use your cousin who’s a lawyer in NJ, having someone familiar with local statute and custom is essential, really. Those attorneys will be familiar with local zoning ordinances, town clerks, engineers and realtors. They may be familiar with each other and the other players in the transaction. When inevitable problems occur, their local knowhow can save the day, or potentially your deposit if handled with delicacy and care.  

3. Be honest with yourself.

This is the most important part of the deal. If you are not certain that you want to buy a property, you need to make a decision as soon as possible. This may seem obvious, but it is not uncommon for buyers to assume that their attorney will “get them out” and wait until the last moment. No matter the quality of your Realtor or your legal council, if you wait too long to act upon your instincts, you are unlikely to get out of your contract without penalty. If you are on the fence, don’t allow yourself to get caught up in the tide of market pressure. Make your offer, independent of outside influence and know when your contingencies expire; every one of them provides you with an escape clause. Make a good offer, set and stick to your goals, stay within your means, and most importantly, leave yourself with options. If you do all those things and keep an eye on the contract timelines, you will always find the path forward – or backwards if that is what you choose.