It’s no secret that today’s housing market fluctuates regularly. While a nice Canadian home in the suburbs might be worth a lot one year, it might only be worth half that the next. Then again, in popular cities like Vancouver and Toronto, where finding affordable housing is an issue, that same suburban household that sold for $100,000 in 1980, now goes for over $1-million. And that’s just for the lot it’s built on. So, it’s no wonder that potential homebuyers are having trouble gathering the necessary finances to afford the home they want. Just the same, it’s becoming hard for current homeowners to get back what they’ve invested in their houses when selling.
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So, if you’re a potential homebuyer, it’s not uncommon to have second thoughts when the idea of spending hundreds of thousands of dollars in mortgage and interest payments for a house finally sinks in. After all, the house itself might not actually end up being everything it appears to be on the surface. Even if the property is in good shape, there are countless expenses that all homeowners must go through at one point or another that range much farther than basic maintenance. For that matter, someday the house could drop in value by a huge margin, meaning the homeowner stands to lose a lot of money if they ever sell. Therefore, it’s not a mystery as to why a lot of potential homebuyers want to back out of their housing deals at the last minute, retracting their offers altogether. However, what will happen if they do? Are homebuyers even allowed to walk away from a deal once the papers have been signed? There must be some consequences, but what are they?
Are You Allowed to Back Out of an Offer You’ve Already Made?
We’ll start with the basics. Let’s say that you’re a homebuyer, looking to become a homeowner and are currently shopping around for the right deal. If you’d just like to visit open houses or make appointments with realtors to look at homes, no one will stop you. If you want, you can look at the same house any number of times. The salesperson might try to coax you into buying it, but you’re under no obligation to do so. However, once you’ve made an offer and signed a legally binding contract, it’s a whole different story. In certain parts of Canada, such as Ontario, some real estate deals are offered up with what’s known as a “buyer’s remorse period”, wherein a potential buyer has 10-days to change their mind about a purchase after they’ve made an offer. While this is a feature for newly built condominiums it does not work for every type of house.
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Therefore, when you make an offer on a house, sign a contract and made a deposit, you’re legally entitled to follow through, at least if you want to avoid a penalty. Now, that’s not to say it’s impossible to back out of a real estate deal. You can arrange for an attorney to break your contract. The problem is, breaking a legal contract is not always consequence-free, especially when hundreds of thousands of dollars are on the line.
Things Generally Seen in an “Offer to Purchase” Contract
Let’s say you’ve looked around and found a house that you’re interested in. Buying a home these days isn’t as easy as offering the seller a briefcase full of cash and taking the keys in exchange. As we said, a legal contract needs to be drawn up in order to present the seller with an offer. There are two types of offers you can make:
- A “Firm” or “Subject-Free” Offer – means that you, as the potential buyer, are willing to purchase the house as it is, no conditions involved, which sellers usually prefer because it gets the deal done faster. However, while the transaction is more efficient, you are legally obligated to purchase the house. If you don’t, you may lose your deposit (to be discussed) and more.
- A “Conditional” Offer – means that certain conditions need to be met before the sale can be completed. For example, the sale will only be completed if a home inspection has been done, if the buyer’s previous home has been sold, etc.
Once your offer has been made, registered, and presented to the potential seller, they’ll have about 72-hours to consider it, at which point they can accept, decline, or make a counteroffer. If the deal doesn’t go through, neither does your offer or obligation to buy. If they accept and an agreement is reached, you’ll need to make a down payment (usually 5% of the overall price) within 24-hours.
Since this is the largest transaction that most people will make in their life, it’s important to draw up a proper contract, making sure both the potential buyer and seller are getting treated fairly. They’re also put in place specifically to minimize any legal ramifications that could arise. Other elements that are seen within the majority of offer-to-purchase contracts include, but aren’t always limited to:
- The Price – the first thing that needs considering is the size of the offer you’re making. If your offer is too small, you might lose the deal altogether. Then again, your offer might be too large and you’ll end up paying a lot more than the property is actually worth, so think it over carefully.
- The Deposit – your deposit is a way of securing your offer, by showing the seller that you’re truly interested in purchasing the house. Generally, interested buyers make a 5% deposit, which will be applied against the overall purchase price.
- The Terms – typical terms dictate the purchase price of the home, as well as the financing the buyer is using. The buyer has the option to set up their own financing through their lender, or assume the seller’s existing mortgage, which can be beneficial if they’re already paying a low-interest rate.
- The Conditions – as was mentioned previously, the conditions are specific to things the potential buyer wants to be included with the sale. If the buyer wishes the seller to pay for any repairs/damages, warranties, etc. found after the inspection, they should include them in the contract.
- The Inclusions and Exclusions – the offer the buyer makes is often dependant on various items that are included or excluded with the purchase, such as appliances, furniture, etc.
- The Closing Day – In Canada, the closing day refers to the date when the house’s title will be legally transferred from the current owner to the new one and all transactions are completed. This procedure varies from province to province. For example, possession of a home in British Columbia only occurs 1-3 days after the closing day.
Note: For any real estate transaction, as well as any of these elements, it’s best to consult a real estate professional for all information you might need.
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Also included in most standard real estate contracts are a number of contingencies, which are elements put in place that permit the potential buyer to retract their offer under certain conditions. They are usually listed at the beginning of the contract, once again designed to avoid as many legal repercussions for both parties as possible.
- Financing – unfortunately, even if a buyer is pre-approved for financing, they may not be approved for the full amount of the house’s purchase price. If this type of contingency is included in a real estate contract, but the buyer can’t secure the necessary financing, they may be able to retain their deposit if and when they back out of the deal.
- Home Inspection – after a home inspection is complete, the buyer will usually be given a grace period of a few days before they need to make a decision. If the inspection turned up with any problems with the property, meaning the terms of your contract haven’t been met, the buyer can demand that the seller make the necessary repairs or they can back out of the deal.
- Appraisal – if an appraisal is lower than the expected amount, the seller can either drop their asking price to meet it, or the buyer can pay the difference. Once again, if the buyer is unsatisfied, they may be able to retract their offer without consequence.
- Sale of Existing Home – if this contingency is part of the contract, it means that the buyer might only purchase the new home once the sale of their current home is complete. If the buyer doesn’t manage to sell their current home, they may be able to walk away from their new contract. However, both parties must agree to this type of deal, and many sellers don’t want to because it means they’ll be taking more of a risk for their own investment.
Generally speaking, these contingencies will come with a certain time limit, meaning the buyer is often able to back out of the deal, without consequence, before the contingencies expire. Once they do expire, the prospective buyer can still walk away. However, having already signed a contract, they may be subject to hefty penalties, which we’ll discuss in the following section.
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What Are The Consequences of Breaking Your Contract?
Simply put, it depends on the terms dictated by the contract itself. Buyers backing out of their contracts is an inevitable occurrence whenever the real estate market takes a dip. Let’s say that a house this month is worth $500,000. A buyer agrees to purchase the house for that much, but the market drops before the closing day, reducing the home’s value to $400,000. The same type of issue can occur if the lender’s appraisal comes back at less than the seller’s initial asking price. Whatever the reason for the buyer’s retracted offer might be, they may suffer heavy legal consequences if they don’t meet the terms of their contract.
In most cases, buyer’s deposit will be the first thing they’ll lose, if and when they don’t follow through with the agreed upon transaction. The seller will retain the deposit if the contract stated that they would have the right once the potential buyer failed to meet the specific terms. However, if there was no such agreement in the contract, the seller’s mortgage broker will usually hold onto the deposit, and cannot legally discharge it to either the buyer or seller until a court order has been mandated. There are even more severe consequences that could befall the prospective buyer if they break the rules of their contract, which can include a hefty lawsuit brought down by the seller. In many cases, the would-be buyer can be held liable for the difference in price after the seller manages to sell their home to someone else.
For instance, a lawsuit involving a couple in British Columbia should be taken as an example to follow if you’re ever thinking about walking away from a real estate deal. Following a spike in the Vancouver real estate market in May of 2016, the B.C. couple made a subject-free offer on a home in Surrey for $1,260,000 and agreed on a closing date of September 1st. However, the couple soon retracted their offer after the B.C. Government imposed a 15% property transfer tax for all foreign nationals buying real estate in the area. On September 2nd, the deal had not gone through, so the seller sued the couple for what’s known as “liquidated damages” and won. Five months later, the seller finally managed to part with their Surrey dwelling for $910,000, a 28% drop in price. The Supreme Court then ordered the would-be homebuyers to pay the seller the $350,000 price difference, plus $10,000 in additional costs pertaining to the property taxes, utilities, and hot tub chemicals spent over the five months that the home remained on the market.
To learn more about the foreign homebuyer’s tax, click here.
Be Mindful of the Deal You’re Making
Remember, becoming a homeowner is one of the most significant decisions you can make in your lifetime. Then again, it’s also one of, if not the most expensive. For that reason alone, it’s extremely important, when you’re involved in any real estate transaction that you consult a professional advisor and get a proper idea of the kind of deal you’re making in the first place. If you don’t read your contract thoroughly, and you decide to back out of the deal, the financial consequences could be severe. While it is your right to walk away, keep in mind that you could end up paying for it.