You cannot void a real estate contract for any reason; it must be done within a section or addendum of the sales contract that allows the buyer to do so. Any execution of a void outside of what the contract allows the buyer to do is considered default. If the buyer defaults on the contract, the seller has the legal right to do two things: 1) either take the buyer to court, force them to perform on the contract (purchase the house), and pay all fees associated, and/or 2) collect the earnest money, which is a deposit put down by the buyer upon execution of the sales contract expressing in good faith that “I will not default on the contract.” These costs are worth thousands of dollars
Most real estate contracts have a number of contingencies to get through. Contingent means dependent. The contract exists and settlement occurs only if certain conditions are met, which are defined in the sales contract and additional addendums. Here is a brief outline of the most popular contingencies:
- Home Inspection Contingency allows the buyer to have a licensed home inspector inspect the home for any existing defects. The buyer normally has a certain period of time to perform this inspection and provide the seller with the results. The buyer is then able to execute a void of contract or, depending on how it is negotiated, the seller may be held responsible for repairs. After the expiration of this contingency, the buyer loses the right to void.
- Financing Contingency provides the buyer with an opportunity to secure financing and get a mortgage for the purchase of the property. If for some reason, the buyer is rejected by a lender and cannot get a mortgage, they have the legal right to void the contract.
- Appraisal Contingency is normally included if the buyer is getting a mortgage. Say you offer $500,000 for your dream home and the seller agrees to that price in the sales contract. You are qualified for a loan of $400,000, which means you are making a 20% ($100,000) down payment and the lender is financing 80% of deal; however, the appraisal determines the market value of the home to be $490,000. The lender is only going to finance 80% of the appraised value! 80% of that $490,000 is $392,000. If the sales price remains at $500,000, and the bank is only giving you $392,000, that means you need to bring $108,000 to the table instead of the $100,000. This contingency says that if this happens, the buyer and seller can renegotiate the contract sales price and if they cannot agree, the buyer has the legal right to void the contract.
- Property Association /Condo Act Document Review allows a purchaser three days from the date and time of receipt to review the resale package of the HOA or condo association they are moving into. It is a legal requirement for all sellers to provide this documentation to buyers. If the seller fails to, or if any of the contents of the package are unsatisfactory to the buyer, they may void the contract.
The above are the most common contingencies within a real estate sales contract. There are other special contingencies that are used from time to time depending on the specific property. They are used mainly for buyer due diligence, and a good agent will know which ones you need depending on that specific property. A contract with a lot of contingencies is more favorable to a buyer, but sometimes a buyer has to give up some leverage in order to compete for a home if other buyers want it too. That can be OK, especially if that buyer is set up with the proper protections after they purchase their home.
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