Contract Contingencies – Getting Out of a Contract

I always appreciate when students send in questions.  I know that if one person has a question, so do others.

Question: As a buyer how can I legally get out of a real estate contract? Can the seller make me buy the property?

First of all, if your contract is written correctly it should have several “contingencies” put in place that will allow you legally to get out of the contract with no cost.  There are people who call these “weasel” or “get out of jail free” clauses. It is a very important part of the buying process.  Here are the three most commonly used contract contingencies:

Physical Inspection

If you think about how much time you really spend in a property before you buy it, it’s maybe just hours, how can you really know what you’re buying? You can’t. That is why you need to do your due diligence and have a professional give an unbiased opinion of the property’s condition. This can also often be an opportunity for an additional round of negotiations, or it may be time to move on.

Loan Approval

Most people who contract for a property will have some kind of pre-approval from a bank or lender, this however is not “final” approval. Depending on the loan there are many things that will need to be verified.  When talking about a conventional loan, the lender will verify things like the buyer’s credit report and score, funds for down payment, reserves and employment to name a few.  Once the loan officer has completed the “package” it will then go to underwriting for final approval.  At this stage the buyer has confidence that the loan will fund.  So contract contingencies can be removed and the deal move forward.  If there is no final loan approval the buyer can cancel the contract.

Home Appraisal

If a buyer is paying all cash for a property, often they will forgo an appraisal. But if there is any kind of loan (conventional or hard money) it will be necessary to have an appraisal. Years ago appraisals were a nonissue. Lenders used appraisers they had relationships with and more importantly were area experts. Today, because of Dodd-Frank, lenders have to pick an appraiser out of a hat which means they could have very little area knowledge.  So, if an appraisal comes in high there is no problem, but if it comes in low that’s when there’s an issue.  Here’s an example of how it works.  The property is under contract for $700,000 with 80% loan to value (meaning the bank could lend up to $560,000.) The appraisal comes in at $680,000 which means now the bank will only lend 80% of $680,000, which is $544,000. The buyer now has to come up with an additional $16,000 in down payment. So the choices are to come up with the cash, get released from the contract or negotiate with the seller.

All these contract contingencies have time frames and if the buyer doesn’t preform within those time fames the seller now has the right to get out of the contract.

So in answer to the question, if the contract is written correctly there are several opportunities to get out of the contract with no risk.

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