When a seller accepts an offer on their home, they enter into a legally binding agreement with the buyer. However, there are some circumstances where a seller may want to back out of the deal even after initially accepting the offer. This can put both parties in a difficult position. Here is an overview of what can happen if a seller decides they no longer want to follow through with the sale after accepting an offer.
The seller breaches the purchase agreement
When a seller accepts an offer, they are entering into a legally binding purchase agreement. This contract specifies the terms of the sale such as the purchase price, closing date, contingencies, and other conditions. If the seller later decides to back out of the deal, they are essentially breaching the terms of the purchase agreement.
The buyer could have a legal claim against the seller for breaching the contract. The buyer may be able to sue the seller for any damages caused by their failure to follow through with the sale. For example, if the buyer ends up purchasing a different property at a higher price, they may be able to recover the additional costs from the seller.
The buyer could have a claim on the earnest money
It is common for a buyer to submit an earnest money deposit when making an offer on a home. This shows the seller that the buyer is serious about purchasing the property. The earnest money is usually held in escrow by a third party until the closing. If the seller breaches the contract, the buyer may have a right to recoup the earnest money deposit as compensation for the seller backing out.
However, the purchase agreement terms will determine who has claim to the earnest money if the seller defaults. In some cases, the seller may still be entitled to retain the earnest money or a portion of it. This will depend on things like:
- Reason for seller defaulting – if it is due to the buyer’s failure to perform, the seller may keep the earnest money
- Wording of the earnest money clause in the purchase agreement
- Whether the buyer is able to prove damages in excess of the earnest money amount
The buyer should carefully review the terms of the purchase agreement before trying to claim the earnest money deposit.
The buyer could sue for specific performance
Another option for the buyer if the seller backs out is to sue for specific performance. This means the buyer asks the court to force the seller to follow through with the sale rather than paying monetary damages.
Courts can compel the seller to transfer the property to the buyer per the original purchase agreement through this legal action. However, courts will not always grant specific performance. Some factors a court will consider include:
- Uniqueness of the property – specific performance more likely granted if difficult for buyer to find suitable substitute property
- Inability for monetary damages to adequately compensate the buyer
- Seller’s reason for breaching – specific performance less likely if seller had valid reason for backing out
- Hardships imposed on seller if forced to complete sale
If the buyer is successful with a specific performance claim, the court can issue an order requiring the seller to follow through with the sale. If the seller refuses, they can be found in contempt of court.
The buyer may recover damages
Suing the seller for monetary damages is another option available to the buyer if the seller breaches the purchase agreement. Damages could potentially include:
- Direct damages – Additional costs the buyer incurs because of seller’s breach. May include higher price paid for another property, legal fees, or fees paid for services related to the original purchase like inspections.
- Consequential damages – Indirect costs incurred by the buyer, like temporary housing fees if forced to continue renting because of seller’s breach.
- Incidental damages – Costs that buyer incurs handling the breach, such as fees paid for title searches or appraisals.
The buyer will need to provide evidence of these damages and what they cost. The purchase agreement will often limit the seller’s liability. For example, the contract may state the seller’s maximum liability is limited to the amount of the earnest money.
The seller could face foreclosure
If the seller had already purchased a new home contingent on selling their current property, they could be at risk of foreclosure if they breach the purchase agreement. By backing out, the seller may end up with two mortgage payments to make each month if they cannot quickly sell their original house to another buyer.
The seller would need to demonstrate they cannot financially support both mortgages to possibly avoid the foreclosure process. However, the seller would likely damage their credit and finances in the process.
The seller may owe the agent commission
In most cases, the real estate agents only get paid their commission when the home sale closes. If the seller backs out, the agents may have claim to their full commission if they had an exclusive listing agreement with the seller.
The listing agreement often will state the commission is owed even if the seller defaults or fails to complete the sale. However, state laws may impact whether the agents can recover their lost commission if the sale falls through. A real estate attorney can help agents determine if they have grounds to pursue the commission.
Seller default clause in the listing agreement
The listing agreement that the seller signs with their agent will generally include a seller default clause. This states what happens if the seller fails to close on a sale after accepting an offer. This clause will often specify that the broker still gets their full commission even if the seller backs out of the deal.
The seller default clause will usually require the broker to make an effort to find another buyer within a set timeframe, such as 60 days. If the broker is able to facilitate a sale to a new buyer at an equal or higher price within the window, then no commission is due on the failed sale with the original buyer.
The property could be tied up in litigation
If the buyer pursues legal action against the seller for breaching the purchase agreement, the property could become tied up for an extended period. The buyer may file a lis pendens, which is a notice that alerts potential buyers that litigation is pending against the property.
Until the lawsuit is resolved, the lis pendens clouds the title and prevents the seller from transferring it to someone else. This makes it difficult for the seller to sell to a new buyer until the courts decide the outcome of the case. The property is essentially in limbo while the legal proceedings move forward, which may take many months or longer.
The seller’s motivations may come into question
Sellers usually have valid reasons for backing out of a deal, such as:
- The seller’s new offer falls through so they can no longer purchase the next home
- Issues found during inspection lead the seller to cancel the agreement
- The buyer cannot secure financing and defaults on the purchase agreement
However, sometimes sellers back out because they have a better offer from another buyer or have seller’s remorse. If the seller appears to act in bad faith without a valid reason, they may have greater liability.
An experienced real estate attorney can help the buyer assess if the seller defaulted simply because they changed their mind or if they had reasonable grounds to cancel the sale.
The seller may lose future offers
Word spreads quickly among real estate agents about sellers who backed out of deals. This can damage the seller’s reputation and cause agents to be wary of bringing offers from their buyers.
Future buyers may be reluctant to make an offer on the home, especially if they know litigation is involved. The seller may have fewer offers to choose from or offers that contain contingencies to protect buyers in case the seller defaults again.
In a hot real estate market, defaulting after accepting an offer likely will not hurt the seller much. However, in a slower market the seller’s choices become more limited if they develop a reputation for being unreliable.
The seller may owe termination fees
When buyers and sellers enter into a purchase agreement, they also often sign contracts with vendors for services like home inspections, appraisals, or surveys for the property. If the seller backs out of the sale, these third-party companies may charge termination fees for cancelling their services before closing.
The seller is usually responsible for covering these expenses associated with terminating the real estate transaction. Make sure you review all contracts carefully so you understand what fees you may owe if you decide to not move forward with the sale of your home.
The buyers could sue for detrimental reliance
When a seller defaults on a purchase agreement, the buyers may be able to make a detrimental reliance claim. This argues the buyers suffered damages because they relied on the seller’s promise to follow through with the sale when making decisions.
For example, detrimental reliance damages could cover:
- Earnest money deposit
- Costs for appraisals, inspections, or surveys
- Fees paid for securing financing
- Rent for temporary housing like storage units
- Moving expenses
- Lost appreciation if the market value increased after accepting seller’s offer
However, the buyers must prove they acted reasonably in relying on the seller’s contractual promise to sell the home. There must be evidence they suffered tangible financial harm directly related to the seller’s breach.
Requirements for a detrimental reliance claim
For buyers to successfully win damages against the seller for detrimental reliance, they must prove:
- The seller made a clear, unambiguous promise in the purchase agreement – i.e. promise to sell the home
- The buyers reasonably relied on seller’s promise
- The buyers incurred expenses, losses or damages directly related to their reliance
- The damages or losses were foreseeable results of the seller breaching the contract
While buyers may sometimes recover damages under this claim, the purchase agreement often limits the seller’s liability. Damages awarded may be less than the buyers’ actual costs.
The seller could be liable for misrepresentation
In some cases, the seller may intentionally misrepresent details about the home to convince the buyer to submit an offer. This could include lying about renovations made, hiding defects, falsely stating the property includes features it does not, or making other deceptive claims.
If the buyer finds out they were duped into buying based on the seller’s misrepresentations, they may have grounds to sue the seller for:
- Fraudulent misrepresentation – The seller knowingly lied or twisted the truth to manipulate the buyer.
- Negligent misrepresentation – The seller provided false information they reasonably should have known was incorrect.
If the buyer proves the seller is liable for fraudulent or negligent misrepresentation, the buyer can recover their monetary damages. This includes direct losses from the seller’s actions as well as consequential and incidental damages in some cases.
What damages can a buyer recover for misrepresentation?
Some examples of damages a buyer may be able to recover if they prove seller misrepresentation include:
- Higher purchase price paid due to seller’s inflated claims about renovations or property attributes
- Costs paid for pre-closing services like inspections or appraisals
- Earnest money deposit
- Rising property values between accepted offer and seller’s breach
- Rental or temporary housing expenses if forced to remain in current home due to seller’s breach
- Storage fees and moving costs from preparations to relocate
Punitive damages may also be awarded if the seller exhibited a deliberate disregard for the buyer’s rights or intended to defraud the buyer.
The title company may determine damages
The title insurance company overseeing the transaction will also research what damages the parties may be entitled to if the seller defaults. The preliminary title report will determine legal ownership of the property and uncover any issues like liens or access rights.
If the seller breaches the purchase agreement, the title company has to stop facilitation services. They will review the purchase contract, listing agreement, and relevant state laws to calculate the damages owed between the buyer, seller, brokers, and any other parties incurring losses from the failed sale.
Title insurance helps cover default damages
Title insurance is an important protection if the seller defaults after accepting the buyer’s offer. This specialized policy offers coverage for losses incurred if the seller cannot legally transfer clear title to the buyer.
For example, title insurance may help cover expenses like:
- Earnest money deposit
- Payments made for services like credit reports, appraisals, or surveys
- Legal fees involved in addressing title defects
The title company will work with the parties to settle damages and claims if the seller breaches the sales contract. This can help reduce legal costs and expedite resolution of the dispute.
Conclusion
When a seller backs out of a deal after initially accepting an offer, it leaves both parties in a difficult situation. The buyer loses the property they planned to purchase, while the seller faces potential legal action and financial ramifications. Buyers have several options available like suing for damages or specific performance. But this can involve lengthy legal proceedings. Sellers also may owe damages to the buyer and brokers.
Both buyers and sellers should understand their rights and obligations under the purchase agreement before entering a transaction. Working with experienced real estate professionals can help avoid misunderstandings about the consequences if a seller defaults after agreeing to sell their property. Proper documentation and clear contract terms are essential to minimize complications if a seller backs out after accepting an offer.