Legal Risks of Backing Out of a Real Estate Contract

Woman tearing contract paper in halfBuying a house is one of the biggest legal transactions most people will ever take part in. Searching for and finding the right house is exciting, but of course, such a major purchase also carries risks. When you are making such a large commitment, you want to make sure nothing goes wrong—but what happens if it does? What are the legal risks of backing out of a real estate contract?

The answer to that question depends on a number of things, mainly the language of your real estate contract, the timing of your choice to back out of the contract, and the reason you are doing so. The terms of your contract are the “private law” governing your transaction. There are certain common provisions in a contract to purchase real estate, but there really is no such thing as a “standard contract.” Your contract should address the details of your particular transaction; this is no time for boilerplate language.

If you do not understand something in a real estate contract, do not sign it. A realtor who tries to pressure you into signing something you do not fully understand is not doing you any favors. A contract creates rights and responsibilities in the people signing it. You cannot later get out of your responsibilities, or ask for more rights, because you did not understand what you were signing.

What Happens if You Back Out of a Real Estate Contract?

You may be able to walk away from a real estate contract without any negative consequences based on contingencies in the contract. For instance, most Michigan real estate contracts for residential real estate provide that a home inspection will be performed. If the results of the inspection are not satisfactory (say, that there are serious defects in the foundation), you should be able to back out of the contract without losing much, or perhaps any, money.

If the seller cannot provide you with clear title to the property (in other words, there is a possibility the seller does not have the right to transfer the property or someone else may have a legal right to the property) you should also be able to back out of the sale without incident.

Similarly, if your purchase of the property is contingent on you being able to get suitable financing, and you are unable to get the financing you expected to, you may be excused from the contract. Another reason you may be back out of a real estate contract is if the seller made a material misstatement on the Michigan Seller Disclosure Statement.

An example of a material misstatement would be if the seller stated that there was no radon or asbestos on the property when they knew that was not true. Stating that a ceiling fan was in good working order when it was not might be a misstatement, but wouldn’t rise to the level of being “material” and justifying cancelling the contract.

What if you simply find a house you like better, or decide that you offered too much money for the house you contracted to buy? Chances are that you are going to take a financial hit. Depending on the specifics of your contract, you could lose your earnest money deposit. This amount varies, usually with the value of the property, but is usually upwards of a thousand dollars, and sometimes several times that much.

Depending on the circumstances, the seller may also be able to sue you for breach of contract for up to six years after you back out of the deal. This could cost you many thousands of dollars more. Even if you end up winning the lawsuit, just having to go through the process is costly and stressful.

Avoiding the Need to Back Out of a Real Estate Contract

Backing out of a real estate contract can be an expensive proposition, especially if the terms of the contract and the circumstances don’t give you an “out.” Rather than signing in haste and regretting it later, the best thing to do is to get the assistance of an experienced Michigan real estate attorney before signing the contract in the first place.

Your real estate agent may represent you in the sale, but he or she is not responsible for protecting your legal interests. While real estate agents necessarily have some understanding of Michigan real estate law, it is not their job to explain the law to you. Having a lawyer on board from the beginning ensures you know what you are signing up for—and can get out of the deal if you need to. We invite you to contact our law office if you have any questions about a prospective real estate transaction.

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