Updated on November 30, 2023
When entering the world of real estate transactions in California, one of the most pivotal stages is the escrow process. It’s a period filled with anticipation, due diligence, and significant financial decisions. But what happens when circumstances change, and either a home seller or buyer contemplates withdrawing from the deal?
The question, “Can a Seller or Buyer Back Out of Escrow ?” is not just common but also laden with complexities. This blog post aims to unravel the legal intricacies and potential consequences of backing out of an escrow contract in California’s real estate market.
We’ll explore the legal framework governing these contracts, the rights and obligations of the parties involved, and the scenarios in which withdrawing from an escrow agreement is possible — or could come with significant repercussions.
Whether you’re a buyer having second thoughts or a seller facing unforeseen challenges, understanding the nuances of escrow agreements is crucial in navigating your real estate journey.
You have signed a contract to buy or sell a house. Once you have signed a contract, the parties enter into a phase of the buy or sell process called escrow. During this phase, the parties hire a neutral third party that holds the money in trust for both sides, which is the escrow company. Before the escrow company releases the buyer’s funds on the day the sale is completed, which is known as the closing, the escrow company will collect all of the necessary paperwork that is required to complete the transaction or will wait for the appropriate instructions of the buyer and the seller.
A key question is whether you can change your mind during escrow?
This is where conditions put on the contract by the buyer or the seller (called “contingencies”) come in.
A purchase and sales contract will typically have a contingency clause that defines several terms that must be met for a real estate contract to become binding on the parties. If all the conditions are met, the parties who signed the contract have to go through with the deal. If the conditions are met and a party refuses to complete the sale, that party then risks creating a dispute with the other side that may require arbitration or litigation to resolve.
On the other hand, if the conditions are not met, there is a possibility that a party can back out on the contract. An explanation of the most common contingencies of a purchase and sales contract for a home will be helpful for understanding how this works.
Little is more frustrating for a buyer than having a seller of real property attempt to back out of a purchase and sale agreement after escrow has opened. Typically, the buyer has spent hours searching for the perfect property, submitting multiple offers and time negotiating the terms of the purchase agreement that they had thought was finalized. If the seller attempts to back out once escrow has commenced, without a valid basis for doing so, then the buyer has at least these 3 options:
In California, most residential purchase and sale agreements are drafted using the California Association of Realtor’s form. This form usually requires that the buyer and seller participate in pre-lawsuit or pre-arbitration mediation before filing their claim to preserve their respective right to recover prevailing party attorneys’ fees and costs in the event they prevail in the lawsuit. Any demand letter should include a demand for mediation.
Despite item 1 above, if the buyer fears that the seller may be attempting to sell the property to someone else, the buyer can file a lawsuit for the purpose of recording a lis pendens (notice of pendency of action). The lis pendens clouds title to the property and makes is so that no new buyer would be willing to purchase the property.
If the seller is willing to give the buyer the deposit back, then some buyers decide to move on. While this is not required, if a buyer was hesitant about the property this can be a second chance for the buyer to back out of the purchase and sale.
We generally recommend options 1 and 2. It is typically very hard for a seller to cancel escrow without any valid reason for doing so. A change of mind is not acceptable. A good real estate attorney will be able to help the buyer push the sale through with aid from the court if need be. We have experience with these matters, and have a track record of getting our attorneys’ fees paid from the unwilling seller too.
During escrow, the buyer has a specific time period during which he must do the following (if these conditions are included in the purchase and sales contract):
The buyer may be able to negotiate with the seller or even walk away based on what comes up during the inspection, which is written in the inspection report. Some contracts will provide an opportunity for the buyer to request repairs from a seller, while other contracts may simply allow the buyer to back out if the inspection report shows bad inspection results.
This step protects the buyer because it ensures that the property is valued at a minimum, specified amount. It also protects the lender because it ensures that the lender does not lend you more money that the home is worth. An appraisal contingency may have terms that allow a sale to continue even if the appraisal is below the specified amount.
Most buyers use some form of financing to fund the cost of the purchase, so this is to ensure the buyers have obtained sufficient financing to pay the sellers.
Conduct a title search and obtain title insurance –
A title search makes sure there are no claims to the property that would be troublesome to the new owner, such as a tax lien, easement, lis pendens, or other cloud on title. Typically the title insurer will issue a policy on after the title search has taken place, so that the insurer will be required to defend the buyer in case there are issues with the title in the future.
If a contingency has not been met, then a party can probably be released based on the terms provided in the purchase and sales contract
For the buyer who wants to get out of a contract, a failure of any one of the contingencies may release the buyer from going through with the deal. For the seller, a failure of the buyer to complete the conditions within the specifically provided time may release the seller from the contract.
If you need help with your seller backing out of escrow, contact our Los Angeles real estate attorney by calling us at (310) 954-1877 , sending us an email at [email protected], or by filling out the contact form on the side of the page.
By Valerie Li, Esq.