Buying a house is a very delicate matter that requires careful preparation and risk assessment, and even a small mistake can cause you severe financial harm.
Prices in the real estate market tend to fluctuate from year to year for a variety of reasons. Property prices rise and fall taking into account economic conditions, location of the house, infrastructure, amenities, and other factors. For example, it is common knowledge that real estate prices are higher in big cities than in suburbs.
Due to the instability of the market, it is more than likely that the price of a concrete house in one suburb will be lower than in another. For a concrete example, a home purchased in 2000 could cost $200,000, while in 2021 it could cost $2 million.
With prices on the rise, it’s no wonder potential buyers are struggling to come up with the money to buy their dream home. It can become a real challenge to save the money for the initial deposit and get your finances in order to prepare for a mortgage. The situation for homeowners does not get any better – they could face the challenge of selling their home for a price at least equal to what they spent to buy it.
If you find yourself in the role of a home buyer, it’s no wonder that you may think twice before making a final decision to purchase a new home. As the initial illusory expectations fade, certain doubts may cross your mind.
After all, the idea of spending thousands of dollars on mortgage and interest payments does not seem as enticing as it did in the beginning.
The other thought is that even if the home you dream of owning were in excellent condition, you would have to make countless payments to keep the mansion in good shape. Another concern that might come to your mind is the possibility that the house might drop significantly in price one day and you might lose your entire investment.
Given these factors, people tend to hesitate, and at the last moment – decide to end the deal with the lender.
So, can you back out of a conditional offer without losing anything? Can you terminate the deal after signing the contract? Let’s fight all the misconceptions.
Can you back out of a conditional offer on a legal basis?
If you have just decided to buy a house and have been looking around the market for the right opportunity, no one can stop you. You have every right to make appointments with different real estate agents, visit the houses you are interested in, or even visit the same house more than once.
The moment you put your signature on the paper, however, the situation changes radically. There would be certain penalties for terminating the contract. However, there is a law in Canada that gives you a ten-day grace period. During this period, you can change your mind about the purchase without incurring penalties.
The rule does not apply to all types of homes. Usually, it applies to newly built homes only.
But even if you signed a contract, there is a way back. You can make an agreement with your lawyer to cancel the signed contract. The only problem with this is that these actions are not free, you will have to pay penalty fees. Since the cost of the house is usually high, the amount of the penalty fee would also be correspondingly high.
What kind of documents can you sign with a potential lender?
Let us say you have finally decided on a house to live in after a long search and hundreds of home inspections. Of course, your first step is not to come to a homeowner with a briefcase full of thousands of dollars to buy a house. You start by making an official offer to the housekeeper. An offer you can make:
- A “Conditional Offer.” This document means that you can only buy a house on the terms set between you and the homeowner. The list of possible conditions could include a home inspection, a credit check, etc.
- A “Subject-Free” Offer. This document states that the home can be sold with no other conditions. This is usually the preferred option as it allows you to sell/buy a home as soon as possible. With this agreement, you are legally obligated to buy a home. If you decide not to buy the house, you will face fees and the loss of your deposit.
You must register the offer and present it to the householder. He has about 3 days to consider your option and give a response, which may be positive or negative. The potential buyer could also make you a counteroffer, setting out his terms for a deal.
If negotiations go well, once the homeowner gives you a positive response, you will need to make an initial deposit within 1 day, usually no less than 5% of the total price.
Since large sums of money are involved in a house sale, the completed offer should be well prepared and not just a list. The signed contract should specify the obligations of both parties and be notarized.
This is necessary to minimize the risk of negative consequences if the deal is terminated or one of the parties fails to fulfill its obligations. The list of elements recorded in the contract usually includes the following:
Sum of the purchase.
This is one of the most important elements of the deal. If you offer less than you should, you could lose the house to the potential opponent or receive a negative response from the buyer. If you bid too much, you could end up paying more than you should.
Deposit amount.
You should state in your offer the amount of deposit you could pay if you get a positive response. Usually, the required amount of deposit is not less than 5% of the total price.
Terms of the offer.
As a potential buyer, you can offer your terms – for example, if you know you’ll need to take out a mortgage to buy a home, you can specify in the offer what type of home loan you would prefer.
Conditions of the offer.
As a potential buyer, you can specify conditions in the offer that might be beneficial to you. For example, if after the home inspection you found that a house needs certain improvements and renovations, you can write down the amount you need for the damaged property.
Subjects to be added to or excluded from the deal.
The final amount offered in the deal depends on several factors. For example, you should specify in the contract whether you prefer to buy a house empty or furnished.
Specified date for closing day.
According to Canadian regulations, the closing date is the same date on which the ownership of the house is transferred to the new owner.
Unforeseeable circumstances
The separate section in the contract is usually devoted to the contingencies under which a prospective purchaser has the right to terminate the contract. The list of these contingencies is usually written in the first part of the contract. Typical items included in this list include:
- Finances. This type of contingency is one of the most important. Even if you, as a potential buyer, have been pre-approved for a home loan by a financial institution, unexpected situations may arise where you do not receive the full amount you qualified for. In these circumstances, you could back out of the deal and even get your down payment back.
- Viewing the property. After fully inspecting the home you want to buy, you might conclude that the condition of the home is not perfect in some respects. Usually, you will be given a period of a few days to make up your mind. If you find that the condition of the home is worse than you anticipated, and that these issues are not consistent with the terms of your contract, you have the right to rescind the purchase agreement or require the seller to make certain repairs.
- Appraisal of the property. If, after the appraisal of the house, it is found that the price of the house is lower than agreed with the seller, the potential buyer has the right to propose a reduction in the price or ask for compensation. If he receives a negative response from the seller, he can withdraw from the deal.
- A new purchase soon after the old house is sold. There is a specific condition that could be added to this section, which states that the buyer cannot proceed to purchase the house until he has completed the sale of his old house. If the potential buyer encounters certain difficulties in selling his old house or if he has been rejected as a buyer, he can back out from buying a new house. However, this point is one of the most contentious between the buyer and the seller. Obviously, the seller wants to skip this point to avoid risky situations.
However, there is a time limit within which you can withdraw from the deal with the seller of the house. If the contingency period specified in the agreement expires, you can no longer terminate the deal without paying penalties.
Consequences of withdrawing from an offer
The matter is quite simple: you will have to face the penalty that was written into your contract after the negotiations with the seller. In fact, it’s common for potential buyers to back out of their offer in the event of a downturn in the real estate market.
Let’s say you purchased a home valued at $650,000. You agree to buy a home for that amount, but the next day you learn that prices have dropped due to the economic collapse, so the price of that home has dropped to $450,000. If there was not a separate item in your contract for this type of contingency, you would face stiff penalties if you decided to walk away from the deal.
The first thing you would lose if you violate the rules set forth in the contract is your deposit. According to the rules, the seller would have the right to keep the deposit if you back out of the deal unless there is a clause in the contract.
It is very important that you state in the contract specific instances when you can return the deposit. If there is any doubt, it will be referred to the court where the judge will decide if the deposit has to be returned.
However, losing the security deposit is not the biggest issue you could face if you decide to cancel the contract. Breaking the rules in the contract can lead to legal action. The seller can sue you for breaking the rules.
If the court concludes that you broke the rules, you will have to pay penalties, including compensation for the price difference if the other bid is lower than the one you made. You could also be required to pay property taxes and household fees for the time the house was without the owner.
A real-life example: A couple living in Vancouver decided to buy a house. After prices rose in the real estate market, the couple made a subject-free offer on a home valued at more than $1 million. However, when the couple found out about the new law that states that foreigners who buy properties in this region will be charged with high taxes, they decided to back out of an offer. Since the couple violated the rules and did not close the deal by the date specified in the contract, the seller sued the couple. He won in court.
According to the court ruling, the couple, who lost in court, was obliged to make up the price difference once the seller succeeded in selling the house to someone else. After five months, he sold the house for an amount significantly less than $1 million. The couple had to make up the price difference with their own money. What is more, according to the court’s decision, they were also required to pay the cost of property taxes and utilities for the five months the house was vacant.
Be careful!
It is always a good idea to consult a professional advisor in such important matters as a home purchase. A lot can happen and if you change your mind at the last moment to sell the house, you should seek professional advice. There are different answers to the question “Can you back out of a conditional offer?” as each situation is specific and only a professional can assess the potential risks you could face. The financial penalties you could face if you make a big mistake can be very high.