Can Sellers Sue a Buyer for Backing Out of a Contract?

Can a Seller Sue a Buyer for Backing Out: A Quick Answer

Regardless of which side of the table you’re on, it’s never a good idea to back out of a deal once it’s already in motion. For the buyer, they have the ability to back out at several stages under the right circumstances. They can withdraw an offer if the seller hasn’t accepted it within a timely manner. They can incorporate a variety of “possible outs” in the form of contingencies into the contract.

However, if they want to back out simply because they have cold feet or they find a better home after already signing a purchase agreement, they could face a lawsuit on top of losing their earnest money deposit. For most people, losing 1% to 10% of the property’s purchase price isn’t an easy pill to swallow.

Regardless of the why, seeking legal action if a buyer backs out is an option, but it can be a lengthy and very expensive process that may not even result in your favor. If a buyer backs out on your deal, you’ll want to weigh your options and consult a real estate attorney before making any decisions. While you can sue a buyer for backing out, sometimes it’s easier to take their deposit, re-list, and include some contingencies of your own with the next buyer.

A Detailed Look at the Legal Ramifications of Pulling Out of a Real Estate Agreement

“What are the legal options and can the seller sue after a buyer pulls out of a real estate deal?” That’s probably one of the most common thoughts someone has when a deal falls through, all because the buyer changed their mind. Unfortunately, deals falling through are becoming more common than they used to be. Redfin revealed that in August, close to 60,000 real estate deals fell through after going under contract.

What’s the culprit?

Rising home prices and interest rates, of course.

In three short years, the median home price in the country went from $329,000 in 2020, up to $416,100 in 2023. That’s a 26% increase! On top of that, interest rates on a 30-year fixed-rate mortgage went from 2.90% up to 7.19%. That’s a huge leap and people are, understandably, hesitant about moving forward with a huge purchase like buying a house.

Credit: Freddie Mac

That being said, most of the people who are putting their homes on the market now aren’t doing so because they want to… They’re doing it because they have to. No one wants to sell a home they got when rates were low just to buy a house that’s going to be undoubtedly more expensive. So, when sellers get an offer on their home and it goes under contract, it’s understandable that they’d be upset when buyers back out.

In this article, we’ll cover the different points of the real estate deal when a buyer can back out without legal repercussions, what sellers can do when a deal falls through, and more.

Can a Seller Sue a Buyer for Backing Out After Signing a Contract?

A seller can sue a buyer for backing out of a real estate deal, but it’s not something that’s done on a whim. In a real estate contract, there are a few contingencies that can protect the buyer, thus allowing them a way out without facing legal repercussions.

Common Contingencies in a Real Estate Contract

Under usual circumstances, buyers will almost always include some kind of contingency in their offer. It’s true that a seller can reject any offers that include contingencies, but you only really ever see that when it’s a strong sellers market and are likely to receive multiple offers.

Buyers almost always include the following contingencies:

Home inspection contingency: Buyers include this contingency to ensure the property they’re buying isn’t riddled with problems that would otherwise be a deal-breaker. Most real estate deals fall through because the home inspector found issues with the roofing, there are structural damage, electrical and plumbing concerns.
Financing contingency: Buyers include this contingency to protect themselves if they are unable to obtain secure financing. If they cannot secure financing, they have no choice but to back out of the deal… No matter how much they actually want to move forward.
Appraisal contingency: Buyers include this contingency to ensure the property they’re buying is actually worth the listing price. If the property appraises for less than the asking price, buyers can back out or negotiate for a lower price. It’s also worth noting that a potential lender often require an appraisal (at the buyer’s expense) before making a decision whether to approve the loan and the terms of the mortgage.
Clear title contingency: Buyers include this contingency because they don’t want to be saddled with the debt of the previous owner. When a title search reveals there are liens on the property, the property taxes haven’t been paid in some time, or even if the property lines are being disputed, a buyer can walk away without issue.
Home sale contingency: Buyers may include this contingency if they have to sell their current home before moving forward with the purchase of a new one. Sellers may also include a contingency similar to this… Meaning they’ll only move forward with the deal if they’re able to successfully purchase a new home.
Attorney review contingency: Although not all buyers will include this contingency with their offers, it is still one worth mentioning. This contingency states that they’ll move forward with the sale if the contract is reviewed and approved by an attorney.

Some of the legitimate reasons a buyer may back out of a deal can include:

Suddenly losing their job
Medical emergency
Cannot secure financing
Cannot sell their current home
Home fails inspection
Appraisal comes in lower than asking
Undisclosed easements on the property
Issues with the title

When Can Sellers Sue a Buyer for Backing Out?

A seller can sue a buyer for backing out if they believe the buyer is in breech of contract. An example of a buyer being in breech of contract a buyer failing to reach out to the seller to negotiate the terms of the deal after a home inspection within the specified timeframe (usually one week after the inspection is completed).

The seller can file something called a “suit for specific performance.” In this, the seller could petition the court to order the buyer to make good on their end of the contract.

In order for the suit for specific performance to be carried out, a few things must be taken into consideration. These include:

A binding and valid contract that can be enforced. A judge can’t order a buyer to go through with the transaction if a purchase agreement hasn’t been signed by both parties.
Specific performance is used when the seller cannot be fairly compensated by money (i.e. the buyer failed to pay their earnest money deposit by the contracted time, therefore there’s no money to keep).
The lawsuit is filed within a reasonable amount of time, which the court will determine on a case-by-case basis.

Keep in mind that not all states permit this type of legal remedy. In most cases, purchase agreements state that if the buyer backs out, the seller can keep the earnest money deposit and that’s all.

Another instance where a seller can sue would be when a buyer completes the contingencies as outlined in the contract (which both parties have signed), but they suddenly decide they don’t want to buy your house and purchase another house instead.

The seller can keep the deposit and even sue for damages because if all the contingencies were met, there should be no reason for the buyer not to move forward.

Can a Seller Sue If a Buyer Backs Out During Escrow?

In the event that the buyer wants (or needs) to back out of the deal after it’s move to the escrow phase, the buyer will find it more difficult to do so without serious repercussions. After all, the deal is just days from closing!

If all the conditions of the contract have been met and all the contingencies have expired, the buyer could lose their earnest money deposit to cover any damages the seller has incurred and even face a lawsuit. This is where the seller could file a suit for special performance.

What Can Seller’s Do After a Buyer Backs Out?

Entering a lawsuit may not be the best option in every situation; property that’s embroiled in a lawsuit cannot be sold until the suit has been settled. In most cases, a seller will keep the buyer’s deposit, cut their losses, and re-list their property.

In the event that a seller finds a new buyer, but it sells at a lower price, the seller could sue the buyer for the difference in price. So, not only would the buyer lose their earnest money, they may have to pay the seller thousands (if not hundreds of thousands!) of dollars due to the property losing value after they backed out. On top of all of that, a seller could sue for legal fees and mortgage carrying costs.

Can Seller’s Back Out of a Real Estate Deal?

Although the primary focus of this article was what happens if a buyer backs out, it’s not unheard of for sellers to back out of a deal. Usually they’ll back out of the deal when a contingency hasn’t been fulfilled. There are a few contingencies a seller will work into the contract to give them a way out without facing consequences. These contingencies include:

Home of choice contingency: Seller’s include this contingency to ensure they have a place to live if they can’t find a suitable home to buy. The timeline for this contingency can range from a few weeks to a few months, depending on whether the seller still has to find a place or if they’re already under contract on a new home.
Rent-back contingency: Seller’s include this contingency if they’re still looking for a place and aren’t having much luck. This option usually only allows the seller to rent-back the home for 60 days before the new owners take over. The tricky part to this contingency is that the buyer and seller have to come to an agreement on the security deposit, rent, and paying the utilities.
Kick-out clause: Seller’s include this contingency because it allows the seller to back out of the deal under the right circumstances. Most commonly, they’ll use this if the buyer submits an offer with a home sale contingency. It could take the buyer months to sell their home before they move forward with this deal. With this clause in place, the seller can “kick out” the original buyers if a better deal comes along.

Sellers can also back out of a contract if:

The buyer cannot secure a mortgage.
An attorney finds a problem in the contract during the attorney review period.
Simply asking the buyer to cancel the contract (though this rarely works).
Proving the buyer is trying to scam the (usually older) seller with a severe low-ball offer.

What Are a Seller’s Consequences for Backing Out?

If a seller backs out of the deal, the buyer can seek the counsel of a real estate attorney and they have the option to sue the seller for breech of contract. Seeking legal action is expensive and time-consuming for both parties and doesn’t always turn out favorably.

Fortunately, if the seller backs out, the buyer can get their earnest money back… No questions asked. Sellers may also have to pay the real estate agent some form of compensation for wasting their time. It all depends on the terms written in the contract.

*Nothing on our website, including this post, should be considered legal advice. This post is for general information only. As always, we recommend consulting a real estate attorney regarding any potential real estate investing legal matters.