Are Buyers Allowed to Back Out of a Real Estate Purchase Agreement in California?
In California, where I am licensed, the real estate contract/purchase agreement is a legally binding contract that outlines the terms of a property sale between a buyer and a seller. This contract is designed to protect all parties involved and must include key elements to ensure its enforceability.
Essential components of a binding real estate contract include:
Purchase Price: The agreed-upon amount the buyer will pay for the property.
Closing Date: The scheduled date when ownership of the property transfers to the buyer.
Earnest Money Deposit: A deposit made by the buyer as a sign of commitment to the purchase.
Contingencies: Specific conditions that must be met for the sale to proceed, such as financing approval or a satisfactory home inspection.
Property Description: A detailed and accurate description of the property, including its address and legal details.
Buyers can get out of a real estate purchase agreement for various reasons, but the most common is due to contingencies. Contingencies are conditions that must be met or the sale to move forward, such as securing financing or passing a home inspection.
One of the most common contingencies is the home inspection contingency—this allows a buyer to make their offer contingent upon the results of a professional home inspection. If the inspection reveals issues, the buyer has options within the timeframe specified in the contract:
Negotiate Repairs or Credits: The buyer can request that the seller make repairs or offer a price reduction to cover the cost of necessary fixes.
Cancel the Contract: If the issues are significant and an agreement cannot be reached, the buyer can withdraw from the deal without penalty, provided the inspection contingency is still in effect.
This contingency protects buyers by allowing them to assess the property’s condition and make informed decisions without risking their earnest money deposit.
As mentioned earlier, the contingency period allows a buyer to withdraw from the contract within a specified timeframe. In California, after signing a real estate purchase agreement, buyers typically have up to 17 days to complete their investigations and remove contingencies. After this period, canceling the contract becomes significantly more difficult and may result in the loss of their earnest money deposit. The length of the contingency period is negotiated and agreed upon when the offer is accepted and ratified.
Another way a buyer can legally back out of a real estate contract is if new or amended disclosures are provided after the offer is signed. In this case, the buyer has the right to cancel the agreement within three days of receiving the disclosures in person or five days if delivered by other means.
To make an informed decision when submitting an offer, the buyer should have access to all relevant property information, disclosures, and documentation upfront.
In California, backing out of a purchase agreement after the contingency period can result in the buyer losing their earnest money deposit, and the seller may even pursue legal action for damages. The seller has the right to sue for specific performance, which seeks to force the buyer to complete the purchase, or for monetary damages, which may include additional compensation beyond the forfeited deposit.
From my experience, I’ve encountered situations where a buyer failed to perform, and we were legally entitled to retain their 3% earnest money deposit, which is typically the maximum amount at risk. However, this is not always the case. Before taking any action, we provided the buyer with ample legal time to respond and issued a Notice to Perform.
A Notice to Perform (NBP) is a formal written demand requiring a party to fulfill their contractual obligations within a specified timeframe or risk contract cancellation. In this case, we required the buyer to either proceed with closing by paying the balance due or face losing their deposit. This tool ensures that all parties adhere to their contractual responsibilities before further legal steps are taken.
The California Association of Realtors (CAR) purchase contract includes pre-written clauses that outline the conditions under which a buyer can legally back out of the agreement. These clauses cover key areas such as:
Contingency Periods: Allows the buyer to cancel within a specified timeframe if certain conditions aren’t met.
Financing Contingency: Protects the buyer if they are unable to secure financing.
Inspection Contingency: Gives the buyer the right to cancel based on the results of a home inspection.
Right to Cancel: Outlines specific situations where the buyer can legally terminate the contract.
Breach of Contract: Defines consequences if either party fails to fulfill their obligations.
These terms are clearly written in the contract to protect both buyers and sellers, ensuring a transparent and legally sound transaction.
As an experienced real estate broker and former court supervisor specializing in probate and trust real estate, I regularly work with attorneys, as well as heirs and family members who may be frustrated with the sale process or estate management.
From my experience, clarity and precision in contracts, disclosures, and all property-related documents are crucial to avoiding legal disputes. Unfortunately, I often see agents submitting offers without the proper training or expertise in handling these complex transactions.
My goal is to be a trusted resource for my clients, ensuring they have all the necessary information to make informed and confident decisions throughout the process.