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How to Break a Real Estate Contract

Updated on July 10, 2010

How to Break a Real Estate Contract

Buying a new house can be an exciting, fulfilling adventure. Unfortunately, that excitement can cloud your judgment and cause you to act quickly without first understanding the entire agreement. Once you sign the dotted sign, you legally obligate yourself to purchase the property at the amount you offered, even if you later discover your dream home isn’t exactly what you thought it would be. If you act fast, however, you might be able to legally break your real estate contract and avoid potentially penalties at the same time.

“Cooling Off” Period

Review your state civil code and locate your state’s contract laws and guidelines for statutory rescissions. Some states extend a statutory right of rescission, often called a “cooling off” period, which allows both parties to withdraw from their side of the contract at any time during that period without penalty. This allows you to legally cancel the real estate contract with the seller while avoiding further liability. Most statutory rescission rights only last up to 72 hours--some as little as 24 hours--so retract your offer immediately after you decide to withdraw following your state’s rescission provisions.

Right of Rescission

Assert your federal rescission rights with the mortgage lender. A federal law called the Truth in Lending Act permits borrowers to cancel a mortgage extension within three business days of receiving the initial offer. If you secured a mortgage for a loan in excess of $25,000 to purchase a residential property, you may be eligible to rescind your acceptance. Provided you entered into the real estate contract on a financial contingency basis--that is, the real estate contract is only enforceable if and when you secure complete financing--you can cancel your mortgage and technically void the real estate contract. The act also allows your lender to charge you a fee if you cancel the loan, however, so discuss the matter with your mortgage company first to see if you are responsible for any rescission fees.

Change in Interest Rates

Catch an increase (or decrease) in the final interest rate. It is not uncommon for the mortgage lender to agree to one interest rate up front and then tack on a few more points when the closing roll around. In fact, the mortgage lender relies on you assuming the contract is correct and signing the dotted line without reading. Normally, it takes one quick phone call to clear up the confusion, but you can use this little swap and sign trick to your advantage: contact your mortgage company and let them know this is not the contract you agreed to sign and that you are no longer interested in doing business. Without a mortgage, your obligations under the real estate contract are usually void, so long as your agreement is on a financial contingency basis. This will also work on the off chance your mortgage lender decreases your interest rate at closing.

Breach of Contract

Substantiate a claim that the seller breached the real estate contract. Real property transactions can often drag out longer than both parties anticipated, but you can use this to your advantage if you wish to break the agreement. For example, if the contract stipulates a date on which the sale and/or transfer will take place, and the seller postpones the sale or transfer for any reason, you can claim the seller breached the contract and terminate the purchase.

Negotiate with the Seller

Discuss your desire to break the real estate contract with your seller. If both you and the seller agree to end the contract for sale, you can do so legally and without penalty. If the seller agrees, draft a new contract that stipulates the original contract is void and neither party requires any performance on the other’s behalf, and then have you, the seller and a disinterested third-party witness sign the document. Note that the seller is under no obligation to cancel the contract and may force the sale if he so desires.

Warnings

With the exception of rescission withdrawals, you will likely lose your earnest money when you break the real estate contract--even if you do so legally--unless the seller otherwise agrees to refund you.

If you made a cash deposit on the property at the time of your bid, you may lose the deposit after breaking the real estate contract. Contact a qualified real estate attorney to learn how to recover some or all of your deposit if the seller refuses to refund it.

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    • profile image

      ben 

      7 years ago

      Tomas, How many Cancelled last 24 hrs

    • profile image

      Tomas 

      7 years ago

      How many real estate closings in percentage are cancelled the last 24 hours before closings

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