How to Cancel a Purchase Contract
Getting Your Earnest Money Deposit Refunded
Just like how the best time to think about selling a home is when you decide to buy a home, the best time to think about canceling an agreement is when you sign an agreement. This means any agreement: a contract to purchase real estate—known as a purchase offer—or a buyer's broker agreement, documents to refinance a mortgage, a listing agreement, or any document that binds you to perform.
Before you sign legal documents such as these, ask how you can cancel if things don't work out the way you hope or if you change your mind. If you don't receive a satisfactory answer or you can't figure it out yourself by reading the cancellation clauses, then don't sign until you have a lawyer review it and advise you. Here is what you should know about canceling purchase and listing agreements.
How to Cancel Purchase Agreements
You can cancel a purchase agreement and get your earnest money deposit back under certain circumstances. Here's what to consider when canceling your purchase agreement.
- Read your agreement: Ask your agent or lawyer to point out the cancellation clauses. In some states, all inspections are completed up front, and once a purchase offer is signed, the offer is binding. In other states, inspections take place after the offer is signed and provide for the return of the buyer's deposit if the offer is canceled due to an inspection.
- Federal law gives buyers 10 days to inspect for lead paint: Ask your real estate agent or lawyer if you need to cancel during this time period. Ask how you do it and which form to sign. You can waive this right in writing, but few buyers would be prudent to consider doing so. Many homes built after 1978 do not contain lead-based paint.
- Cancellation before a contingency period: In some areas of the country, a home inspection is performed after the purchase contract is signed. You may uncover significant defects that cause you to cancel, and property condition might be covered in your contract as a contingency period. Another contingency might be the appraisal or loan. If you cannot obtain a loan or if your appraisal doesn't meet the sales price, you might be able to cancel.
- After expiration of inspection periods: Some states have a default timeframe for inspections to be completed. For example, in California, the standard default period for inspections to be completed is 17 days. However, if you don't withdraw all contingencies, that time period is extended until the contingencies are withdrawn. In other words, you don't lose the right to cancel simply because the contract cancellation period has expired or lapsed. It continues until the seller objects.
If your inspection period has expired, sellers may give buyers a notice to perform, which calls for action within a certain time period (typically 72 hours). If you don't sign a release of contingencies within that time period and deliver it, the seller can cancel the contract.
How to Cancel a Listing Agreement
A listing agreement is when you commit to working with a specific real estate agent. Before you sign a listing agreement, ask your agent if you can be released for any reason, even if that reason is, "Hey, I want to list with another broker." If your agent tells you "no," you might not want to list it with that company.
If you didn't ask your agent about canceling before signing, be aware that exclusive right-to-sell listings contain a safety or protection clause. If you ask an agent after the fact to cancel the listing and the agent refuses, call the agent’s broker and request a cancellation. Your listing, believe it or not, is not between you and your agent. It is between you and the agent's broker.
If the broker rejects your request for cancellation, then ask the broker to assign another agent to you. Most brokers are happy to assign another agent and keep the listing in-house. The way this works is often the broker will pay your fired agent a referral fee.
If there are no workable solutions, call a real estate lawyer for termination assistance, but first, tell the broker of your intentions to do so. Sometimes that’s enough to get a release.
Ask your agent to give you a form called termination of buyer agency. The TBA issued by the California Association of Realtors, for example, will cancel oral or written agency agreements when properly acknowledged and executed.