Schorr Law Blog

When Can a Seller Back Out of Escrow?

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/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? What if the buyer no longer wants to buy the house? What if the seller no longer wants to sell the house? Can you get out of your contract?

This is where conditions put on the contract by the buyer or the seller (called “contingencies”) come in.

What are contingencies?

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.

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):

Conduct an inspection. 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.

Conduct an appraisal. 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.

Secure financing. 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.

Schorr Law has experience with buy-sell disputes for home and commercial sales and purchases. To see if you qualify for a free 30-minute consultation, you can contact us by phone at (310) 954-1877 or by email at info@schorr-law.com. You can also send us a text to (323) 487-7533, or send us a message through our easy to use Contact Us form.

By Valerie Li, Esq.

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