What Happens When a Buyer Backs Out of a Real Estate Deal?

When housing markets begin to cool after record highs, some homebuyers get cold feet. Imagine you buy a home for $1.2 million. When it comes time to close after you have signed your purchase agreement, you notice a comparable home down the street sells for $855,000. What happens when a buyer backs out of a real estate deal?

Some homebuyers choose to walk away when it comes to closing day, despite agreeing to purchase the property. Another common scenario occurs when a homebuyer backs out after overbidding in a hot market and going over budget. Once it comes time to close, the bank completes an appraisal and refuses the entire mortgage amount. The homebuyers need to come up with hundreds of thousands of dollars to close. They walk away because they don’t have the money, despite signing an agreement to purchase.

No matter the scenario, walking away at closing after you sign a purchase agreement can have significant legal and financial consequences.

When you back out of the deal, it will cost you. You instantly forfeit the deposit you submitted with your offer. You are also at risk of being sued by the seller for money they have lost on the sale of their home. Understanding the purchase agreement and adding conditions to protect you from unforeseen circumstances is essential.

Understanding your Agreement of Purchase and Sale

An Agreement of Purchase and Sale is a firm and binding deal that allows the buyer and seller to proceed with the sale. It outlines the terms and conditions of your home purchase. As a legal agreement, backing out comes with serious consequences.

Once the buyer and seller sign a purchase agreement, it becomes legally binding. Typically, the buyer provides a deposit between one and three per cent of the purchase price to show the seller that they will honour their agreement and complete the purchase. Backing out of the deal after signing the contract and paying the deposit means you do not get that money back.

Are there legal ways to back out of a real estate deal?

There are a few legal ways to back out of a deal. The first is if the sale was conditional and the conditions were not met. It could result from a significant issue in the home inspection, a low appraisal, or the inability of the buyer to sell their current home. Regardless of the reason, the deal dies automatically if the conditions are not fulfilled.

Additionally, an agreement could become null and void for reasons outside the contract’s conditions. Common issues that can end a deal are a lien on the home, substantial damage to the property before closing, or if the buyer can prove that the seller knowingly misrepresented the property in a significant way (however, misrepresentation can be hard to prove in court).

The risks of backing out of a deal at closing

Buyer’s remorse is not part of real estate. Once the buyer and seller have signed the purchase agreement and the conditions have been satisfied, both parties must abide by the contract. There is typically not much leeway to cancel a real estate purchase.

Sellers may feel that they overpaid, or their financial circumstances have changed, but those reasons may not justify the potential consequences of walking away.

If the buyer walks away, they may forfeit their deposit and could be sued by the seller for loss in the value of their property on resale.

If the seller eventually sells their home for a lower price, they may sue for the difference in price. Let’s say there was an agreement to purchase the house for $850,000. The closing day comes, and the buyers back out. The home then goes back on the market. The best offer is $700,000. The home buyers that backed out on closing day now must make up the money the sellers lost. In this case, that is $150,000.

This nightmare scenario has played out. In Gamoff v. Hu, the buyers lost their $30,000 deposit, and they were ordered by the Ontario Superior Court of Justice to pay $470,000 in the lost value after they backed out.

You may also be responsible for the seller’s legal fees, mortgage carrying costs, and any other losses the seller suffered.

How to avoid the risks of backing out at closing?

With the help of legal representation, there are a few things that you can do to protect yourself from these circumstances. Consult with your lawyer before signing an Agreement of Purchase and Sale to determine if there are terms to add that will protect you, as the buyer.

Setting the right contingencies within the contract is the best way to protect yourself from some of the most common issues home buyers encounter.

With a low inventory and rising competition for homes across Canada, it may be tempting to waive any conditions, especially when competing against multiple offers. Discuss the situation with your lawyer, consult a financial advisor and consider getting a mortgage pre-approval, to help ensure that you add the right conditions to your Agreement of Purchase and Sale before signing on the dotted line.

Originally published on the RE/MAX Canada Blog.