What this article is all about:
Why Withdrawals Happen
Sometimes the unexpected can happen to a prospective home buyer, who decides he or she cannot go through with the purchase of a home. What matters is that if you have to cancel a home purchase, announce your decision as soon as possible, in order to avoid losing money and causing the seller unnecessary hardship.
The most common reason home buyers withdraw from their purchase contract is because they can’t secure a mortgage commitment under the terms defined in the contract. Other scenarios for backing off from the deal: You found a home you liked better, or the real estate attorney who just reviewed your contract tells you that the terms to which you agreed benefit the seller much more than you. Or, you and the seller sign the deal, but during the contingency period, your home inspector finds the property needs important repairs for which the seller doesn’t want to pay – and neither do you.
Put it in Writing
It’s relatively easy to withdraw your offer if the home’s seller has not yet signed the purchasing contract. As long as you don’t have written acceptance of the contract by the seller, you are still considered to be in the negotiating stage of the home-buying process. If you change your mind at this stage, have your real estate agent or attorney draft a letter to the seller’s representative, stating that you are withdrawing your offer. And because you should never deliver any earnest money deposit to the seller or his agent until all parties have signed the purchase contract, there should be no earnest money deposit to recoup.
Withdrawing from a purchase contract after the seller has formally accepted the contract in writing can be a more daunting experience. If the date of your decision falls within what’s called the contingency period, during which, for example, an attorney reviews the purchasing contract, or your mortgage is being worked out and confirmed, the cancellation requires a formal, written procedure.
Your attorney or agent must draft a letter called a purchase contract cancellation agreement. This letter will contain a passage stating that all signatories to the contract agree to cancel any and all agreements made in the contract and the contract is thereby declared null and void. The letter also stipulates that any earnest money should promptly be refunded to the parties who signed the contract. The purchase contract cancellation agreement must also include obvious information, such as the address of the property, the date the contracts were accepted, the names of buyers, etc. Subsequently, the buyers and sellers who signed the original contract must sign the purchase contract cancellation.
Defaulting on the Contract
The situation is worse for a buyer who changes his mind after he and the seller have signed the purchasing contract, and the agreed-upon time period for inspections, loan approvals or contract reviews has passed. In that case, the former buyer is considered to have defaulted on the contract and stands to lose his or her earnest money deposit. Most residential purchase contracts state that if the buyer defaults, the earnest money goes to the seller as “liquidated damages.”
In order to avoid such a painful financial loss, every prospective home buyer should retain an attorney before signing any contract. An attorney can negotiate necessary extensions of contingency periods with the seller, which could protect your earnest money deposit in case you suddenly find yourself in one of the scenarios described above.
The decision to withdraw an offer and its consequences can emotionally drain buyers and sellers alike. So if you decide to cancel, it’s a good idea to leave the official steps to your attorney or agent.