What Happens When a Buyer Backs Out of a Real Estate Deal?

When housing markets begin to cool after record highs, some homebuyers get cold feet. Imagine you buy a home for $1.2 million. When it comes time to close, you notice a comparable home selling for $855,000 down the street. Now you’re having second thoughts. But can a buyer back out of an accepted offer in Canada?

Can a Buyer Back Out of an Accepted Offer in Canada?

Some homebuyers choose to walk away when it comes to closing day despite agreeing to purchase the property. There are actually many valid reasons to back out of buying a house. A common scenario occurs when a homebuyer backs out after overbidding in a hot market and realizes they got caught up in the moment and are now way over their purchase budget. Another happens when it comes time to close, and the mortgage-lending bank completes its appraisal and refuses to back the entire mortgage amount. The homebuyers, now faced with the need to come up with hundreds of thousands of dollars to close, walk away because they don’t have the money, despite signing an agreement to purchase.

But no matter the scenario, walking away at closing after you sign a purchase agreement can have significant legal and financial consequences.

When you back out of a signed real estate deal, it will usually cost you. Not only do you instantly forfeit the deposit you submitted with your offer, but you are also at risk of being sued by the seller for money they have lost on the sale of their home. In order to avoid these pitfalls, it’s crucial to understand how purchase agreements work and why adding conditions to protect you from unforeseen circumstances is essential.

Understanding your Agreement of Purchase and Sale

An Agreement of Purchase and Sale is a firm and binding legal document that allows the buyer and seller to proceed with the sale. It outlines the terms and conditions of your home purchase, and as a legal agreement, backing out can create serious consequences.

Once the buyer and seller sign a purchase agreement, it becomes legally binding. Typically, the buyer provides a deposit of between one and three percent of the purchase price to show the seller that they will honour their agreement and complete the purchase. Backing out of the deal after signing the contract and paying the deposit means you do not get that money back.

When is it Too Late to Back Out of Buying a House?

In general, it’s too late once you’ve signed your purchase agreement, BUT, depending on the province, there may be a three- to 10-day rescission period after the seller receives a signed Agreement of Purchase and Sale that allows buyers to back out of a real estate deal without facing severe consequences.

Are There Other Legal Ways to Back Out of a Real Estate Deal?

Can you back out of a house sale without losing your deposit or triggering litigation? The answer is yes; there are several legal ways to back out of a deal.

The first is if the sale was conditional and the conditions were not met. This situation could result from the finding of a significant issue, such as a rotting roof or crumbling house foundation during the home inspection process. It could also occur due to a low appraisal of the property by the prospective buyer’s mortgage financer or bank. Since the appraised value of a property determines the maximum loan amount the lender will provide, if the appraisal is $100,000 less than what the buyer agreed to pay for the property and the buyer doesn’t have the resources to provide the extra cash needed, the deal will not go forward. Sometimes, a condition of sale is that the buyer is able to sell their home before the closing date indicated on the contract. If the buyer cannot sell their current home, the deal will not proceed. Regardless of the reason, the deal automatically dies if any of the conditions listed in the Agreement of Purchase and Sale are not fulfilled.

Additionally, an agreement could become null and void for reasons outside the contract’s conditions. Common issues that can end a deal are discovering a lien on the home, realizing substantial damage has been done to the property before closing, or if the buyer can prove that the seller knowingly misrepresented the property in a significant way.

Every time a seller responds to specific enquiries or the standard enquiries in a property information form, they are making a representation about the state of the property to their buyer. If a seller knowingly and dishonestly withholds information or presents knowingly false information in response to these queries, they are making a misrepresentation. For example, if a seller is asked whether the property has ever had a termite infestation and they dishonestly answer no, but after the sale is done, neighbours confirm that the entire street has had issues with termites over the past few years, the seller has misrepresented their response and can be sued for misrepresentation, since the buyer effectively lost the opportunity to negotiate a better purchase price for the property or walk away from the deal.

The Risks of Backing Out of a Deal at Closing

Buyer’s remorse is not part of real estate. Once the buyer and seller have signed the purchase agreement and all conditions have been satisfied, both parties must abide by the contract. There is typically not much leeway to cancel a real estate purchase.

Buyers may feel they have valid reasons to back out of buying a house, including that they overpaid or their financial circumstances have changed. Still, those reasons may not justify the potential consequences of walking away.

If the buyer walks away, they will likely not only forfeit their deposit, but the seller could also sue them for any loss in the value of their property upon resale.

Let’s say there was an agreement to purchase the house for $850,000. Then closing day comes, and the buyers back out. The home then goes back on the market. The best offer is now $700,000. The home buyers who backed out on closing day could be sued for the difference in price in order to make up for the money the sellers lost. In this case, the buyers who walked could end up owing $150,000.

This nightmare scenario has played out. In Gamoff v. Hu, the buyers not only lost their $30,000 deposit but were also ordered by the Ontario Superior Court of Justice to pay $470,000 in lost value after they backed out.

If you find yourself in this predicament, you may also be responsible for the entirety of the seller’s legal fees, mortgage carrying costs – and any other losses suffered by the seller – which could end up totalling almost as much as the cost of the property you walked away from.

How to Avoid the Risks of Backing Out at Closing?

With the help of legal representation, there are a few things that you can do to protect yourself from these circumstances. Consult with your lawyer before signing an Agreement of Purchase and Sale to determine if there are terms to add that will protect you as the buyer. Setting the right contingencies within the contract is the best way to protect yourself from some of the most common issues home buyers encounter.

With the low inventory and rising competition for available homes across Canada, it may be tempting to waive any conditions, especially when you’ve found just the right property in a neighbourhood you’ve wanted to move to for many years or when competing against multiple offers in a bidding war. Discuss the situation with your lawyer, consult a financial advisor and consider getting a mortgage pre-approval to help ensure that you add the right conditions to your Agreement of Purchase and Sale before signing on the dotted line.

What Happens If the Sellers Back Out?

Like a homebuyer, a home seller who backs out of a purchase agreement can face legal consequences for breaching the contract. Now, while several ramifications could transpire – such as a buyer suing for damages plus the property – the typical conclusion to this sort of circumstance will be that a court orders the seller to sign over a deed to the buyer and complete the sale.

Of course, there are many reasons why sellers might choose to renege on a deal as well, including:

• If a seller experiences an unexpected personal emergency, such as the death of a partner whose name was the only one on the title of the property
• Sentimental factors, such as the sellers experiencing a change of heart when realizing that they have a significant emotional attachment to the home. In that case, the seller might ask to be released from the agreement, hoping that the buyer consents to this request. The seller would explain the reasoning behind their decision and endeavour to reach a conclusion without the courts or additional financial penalties.
• If the sellers determine that the prospective buyers are being overly difficult, making too many unreasonable or costly pre-sale demands, or if they deem that the buyers have already violated the contract terms
• Approximately half of all real estate agreements are estimated to have an inspection contingency. Since many of these services will likely uncover a defect, the sellers might choose not to modify the original purchase agreement and walk away from the sale.
• If the sellers discover that another bidder wants to buy the property at a much higher price

For the most part, though, the most common reason that sellers back out of a deal is that the sellers have trouble finding a new home to purchase before a prospective closing date. Perhaps the house sold faster than the seller expected, or a new place has been challenging to identify because property prices are too high. Remember, Canadian real estate prices have not fallen below pre-pandemic levels, and depending on the location, home valuations could be much higher now than they were even a year ago.

In some instances, the buyer could have been found to have defrauded the seller. This typically occurs in all-cash deals. House-buying scams operate by capitalizing on homeowners’ need to sell quickly. Scammers use various tactics, including offering above-market prices, insisting on overly quick transactions without proper documentation or home inspections, or pressuring sellers to sign over their property rights before the deal is officially closed. These scams can also involve hidden fees, forged documents, fake cash offers or wire transfers, leaving sellers facing financial losses or loss of their property altogether. If scammers impersonate legitimate companies or individuals, it can be challenging for sellers to discern the fraud until it’s too late.

Red flags that could indicate you’re dealing with a fraudster include:

• Presenting false identity documents and contact information.
• Lacking a digital footprint to validate their identity. Cash-buying companies will likely have a website with valid contact information that you can verify numerous ways, and even individual cash buyers should have various social media profiles or some kind of online footprint that you can reference as part of a cursory identity check. If you try to research the cash buyer and can’t find any information about them on the Internet, it’s a warning sign that they could be a scammer.
• They won’t provide references. Reputable cash buyers will not only provide you with references but will often offer them before you ask.
• Asking for sellers to cover upfront administrative or processing fees in order to proceed to the next step in the sale.
• Not agreeing to provide proof of funds so you can ensure there’s no risk of the deal falling through.
• Overpaying by cheque, then asking you to transfer the difference to them and cancelling the cheque.

In order to avert a legal and financial disaster that could cripple sellers’ bank accounts, real estate agents and legal experts recommend a thorough vetting process for both buyers’ and sellers’ identities and inserting contingencies inside the purchase agreement that can protect either the buyer or seller’s needs (or both).

Buying or selling a detached house, townhome, or condo can be a daunting task. In a climate of high inflation, skyrocketing borrowing costs and an anemic economy, it can be even more unnerving.

Can a buyer back out of an accepted offer in Canada without incurring penalties or being subject to prosecution? Yes, it’s possible, but working closely with a lawyer and real estate agent is imperative to ensure that every avenue has been explored before you do and that all legal options have been considered.

Buying or selling a home is one of the biggest financial transactions you will ever make, and it’s important to have the best team looking after your interests.

Connect with a RE/MAX agent and see the difference that adding an experienced real estate professional to your team can make.

This article is not intended as legal advice. We recommend obtaining the guidance of a qualified real estate lawyer when dealing with these issues.