Can a Buyer Back Out of Escrow?

by Ann Johnson ; Updated July 27, 2017

For most people, buying real estate is the largest purchase they will ever make. It normally involves a significant loan commitment, taking decades to repay. While property ownership comes with benefits it also comes with responsibilities, and sometimes those seem overwhelming to potential buyers, causing them to back out of existing escrows. Backing out of an escrow can cost the unwilling buyer money.

Purchase Contract

Real estate laws and practices vary by state, yet the consequences to the buyer when cancelling an escrow are often contained within the purchase contract. When a buyer makes an offer to purchase real estate, he prepares a purchase contract, specifying the offer price and terms of the purchase. Each state may have a standard purchase contract used by real estate professionals in that state. Yet, technically, it is possible to write up a purchase contract on the back of a napkin. It becomes a binding contract when signed by all parties and after meeting all contingencies contained within the contract.

Escrow Period

After the buyer and seller sign the purchase contract, they can enter into an escrow process. This period begins after the parties sign the contract and ends when title conveys to the buyer. During this period, the buyer completes financing for the property and a title search verifies the seller’s right to convey title to the buyer. It is also a period to deal with contingencies.

Contingency

Purchase contracts normally contain contingency clauses, which are acts or events that must occur before the contract is binding on the buyer. One common contingency clause is the buyer’s inspection. In many purchase contracts, the buyer has the right to inspect the property during a specific time frame, such as 10 days after the seller accepts the offer. During this period, the buyer can back out of the offer if he is unhappy with the inspection report. A contingency clause gives the buyer a way to back out of a contract without retribution from the seller, providing the cancellation of contract falls within the terms of the contingency.

Consequences

When a buyer makes a real estate offer, she normally puts down an earnest deposit. The amount of an earnest deposit is a negotiable amount between the buyer and seller. The funds normally go toward the sale price. Purchase contracts often specify that if the buyer backs out of the contract without cause she forfeits the earnest deposit. Some contracts specify the earnest contract is the only retribution for the seller. Yet, in some instances, depending on the terms of the purchase contract and state law, the seller can sue the buyer for nonperformance.

References

  • "Modern Real Estate Practice"; Galaty, Allaway and Kyle; 2006

About the Author

Ann Johnson has been a freelance writer since 1995. She previously served as the editor of a community magazine in Southern California and was also an active real-estate agent, specializing in commercial and residential properties. She has a Bachelor of Arts in communications from California State University, Fullerton.