Sarah and Mike thought they had found their dream home.
After months of searching, they submitted a conditional offer that was accepted by the sellers. Everything seemed perfect until the home inspection revealed significant foundation issues that would cost them tens of thousands to repair—issues that weren't visible during their initial viewing.
Thankfully, their conditional offer included a home inspection clause, allowing them to back out from the purchase without losing their deposit. While they were disappointed, this protection saved them from a potentially costly mistake.
Stories like Sarah and Mike's highlight why understanding conditional offers—and when parties can back out of them—is crucial for anyone looking to buy or sell a home. Let's break down the specifics of conditional offers and the circumstances under which either party can walk away.
What Is a Conditional Offer?
A conditional offer is a purchase agreement that includes specific conditions that must be met before the sale becomes final. These conditions protect both the buyer and seller by allowing them to exit the deal if certain requirements aren't met.
When Can a Buyer Back Out?
Buyers have the most flexibility to back out of a deal during the conditional period. In order for a buyer to be able to back out, the offer needs to have specific conditions within if those conditions are not met, the buyer may back out. If there is no condition present, or the condition has been met, the buyer may not be able to back out and the agreement becomes binding.
Here are some examples of conditions that may cause a homebuyer to back out:
1. Financing conditions aren't met: If the buyer can't secure mortgage approval within the specified timeframe, they can withdraw from the deal without penalty.
2. Home inspection reveals issues: When a home inspection uncovers significant problems not previously disclosed, the buyer can choose not to proceed.
3. Status certificate review (for condos): If the review reveals concerning financial or legal issues with the condo corporation, the buyer can exit the agreement.
4. Sale of existing home condition: If the buyer can't sell their current home within the agreed-upon timeframe, they can back out if this condition was included.
When Can a Seller Back Out?
Sellers have more limited options to back out of a conditional offer, but they may do so in these circumstances:
1. When conditions aren't waived by the deadline: If the buyer fails to waive or fulfill conditions within the specified timeframe, the seller can cancel the agreement.
2. During the conditional period, sellers can accept backup offers but cannot actively back out just because they received a better offer if all conditions are met. A seller can consider additional offers even after signing a conditional offer. This is because the sale is not final and binding on both parties until all the conditions in that offer have been either fulfilled or waived.
3. When the buyer breaches the agreement: If the buyer fails to meet their obligations under the agreement, the seller can terminate the deal.
Important Considerations for buyers and sellers
The ability to back out comes with some very important caveats:
All parties must act in good faith when trying to fulfill conditions
This means taking reasonable steps to fulfill the conditions. For example, a buyer can't simply claim they couldn't get financing without actually applying for mortgages from multiple lenders, or a seller can't deliberately delay providing necessary documents for a status certificate review.
Backing out without a valid reason could result in legal consequences
For instance, if a buyer claims they couldn't secure financing but actually just found a different property they preferred, they could face a lawsuit from the seller for breach of contract and potential damages. Similarly, if a seller tries to cancel a conditional offer simply because they received a higher offer, they could be legally obligated to proceed with the original sale.
Written notice is typically required when exercising conditional rights
A simple phone call or text message isn't enough. For example, if a buyer discovers serious issues during a home inspection, they must provide formal written notice to terminate the agreement before the condition deadline. This usually involves submitting specific forms through their real estate agent or real estate lawyer within the specified timeframe.
Deposit handling varies depending on the circumstances of cancellation
For example:
- If a buyer backs out due to a failed financing condition that was properly included and exercised, their deposit should be returned in full
- If a buyer fails to fulfill conditions without valid reasons, the seller might be entitled to keep the deposit
- In disputed cases, the deposit typically remains with the seller’s real estate brokerage in a trust account until both parties agree on its disposition or a court orders its release
How to Protect Yourself with a conditional offer
Whether you're a buyer or seller, here are key steps to protect yourself:
1. Work with experienced real estate or legal professionals who can properly structure your conditional offer. Even the smallest error can be costly, so choose wisely.
2. Ensure all conditions and deadlines are clearly written in the agreement
3. Keep detailed records of all attempts to fulfill conditions
4. Communicate promptly and in writing about any issues that arise
FAQs
Q: Can a seller accept another offer while mine is conditional?
A: Yes, sellers can accept backup offers, but they cannot cancel your conditional offer simply because they received a better one if you're fulfilling all conditions.
Q: What happens to my deposit if I back out during the conditional period?
A: If you back out based on a failed condition that was properly included in the offer, your deposit should be returned. However, this must be done according to the terms of your agreement.
Q: How long does a conditional period typically last?
A: Conditional periods usually range from 5-10 business days, though this can vary based on the specific conditions and what's negotiated between parties.
Remember, while conditional offers provide important protections, they should be handled carefully and professionally to ensure a smooth transaction. Working with experienced real estate professionals and a qualified real estate lawyer can help ensure your interests are protected throughout the process.
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