Good Reasons To Cancel Your Real Estate Contract
Buyers are cancelling escrows lately, but is it a good idea? On this week’s episode we discuss the good reasons to cancel a real estate contract and the impact it will make. Check out the full episode and if you have questions about how to get started with Homeowner Prep, be sure to reach out to us or drop your question in the comments.
What You’ll Learn from this Episode:
- What the contingencies period are
- What a earnest money deposit is
- How cancelling may impact your ability to buy in the future
- And much more!
00:00 How Much You Need To Earn To Buy A Home
00:37 Welcome To The Homeowner Prep Podcast
00:48 Before We Dive In…
01:08 The Contingency Period
01:48 What Is An Earnest Money Deposit
02:31 Good Reason No. 1: Inspection Issues
04:00 Good Reason No. 2: Appraisal Gap
05:09 Good Reason No. 3: If You No Longer Qualify
07:02 What Happens When You Cancel Your Contract?
08:11 If You Cancel, Can You Still Buy Another Home?
09:16 Getting Started With Homeowner Prep
09:36 Connect With Us On Social Media
“You do not want to buy a house that you can’t afford, and the bank won’t let you buy a house that you can’t afford if you’re getting a loan.”Eric Hellon
Full Episode Transcript:
Some numbers came out recently showing that buyers are canceling their real estate contracts at a record number. So on today’s episode, we’re going to talk about some good reasons why you should cancel your real estate contract and the potential impact of that decision long term.
Hello and welcome to the Homeowner Prep Podcast. I’m your host Eric Hellon, and on today’s episode, we’re going to talk about some good reasons why you should cancel a real estate contract. Now, before we dive into this, I just want to make it very clear that I represent California. I am licensed in California. I know the California real estate contract like the back of my hand. But if you’re in another state, definitely seek out advice from a local real estate agent and if you don’t know one, we can get you connected with someone there in your local neighborhood.
The main thing to be aware of is the fact that when you purchase a home, you write up an offer and that offer gets accepted, you will have a contingency period. This is a time where you’re able to do all of your due diligence. Find out everything that’s going on with the home, get the home appraised if you’re getting a loan and truly find out if this home is worth the price that you’re willing to pay for it during this contingency period.
This is a time for you to back out if you need to. You don’t want this period to pass you by and then try to back out at that time because you could be risking your earnest money deposit and you could be risking lawsuits even. Your earnest money deposit is the money that you put down when you made that offer. It’s showing that, hey, I’m a serious buyer. Most earnest money deposits are about 1% of your offer price. So if you’re offering $500,000, it’d be a $5,000 earnest money deposit.
So we don’t want that to be at risk. If you cancel after the contingency period, the seller has access to that, and so you could lose out on $5,000. That’s why it’s important to know what your contingency periods are, understand what they are, do your inspections, do all your homework, and get those done in that time frame. So when it comes to the different types of contingency, these are really the good reasons why you should back out of a contract if something comes up.
The first thing is inspections. Inspections are done on the home. You’re going to have a home inspection, you should have a pest inspection, if there’s anything that’s found, you should dive a little deeper, maybe look at the roof, if there’s any potential mold you want to have that inspected. So you’re going to do a lot of your inspections up front. As soon as your offer gets accepted, your agent should be scheduling those inspections right away.
You have a time period to get those inspections done, get the reports back and truly analyze it to see if there’s some issues there that will cause you to cancel the contract. Some of these issues need to be big ticket items. I mean, if there’s a broken baseboard or if there’s a very small crack in a tile, obviously those aren’t reasons to cancel your contract, but if the roof has a major leak and the seller decides that, “hey, we’re not going to pay for that, we’re not going to give you any type of credit and we’re not going to get it repaired”, well then maybe you have cause to go ahead and cancel your contract.
That would be a good reason to cancel, but remember, you want to have a good reason, not just any reason. So really analyze your inspection report and realize that every home has issues. I’ve been in brand new construction homes, I have personally purchased brand new construction homes, and when we do our walkthroughs and our inspections, we find a number of issues that need to be addressed. So just because your home is brand new or 20 years old doesn’t matter. Chances are your home inspector, if you have a good one, is going to find some issues that need to be addressed.
The second good reason is actually if you’re getting a loan. If you’re getting a loan on a home, the bank is going to have an appraisal done, and this is why it’s always important to know as a buyer, whatever you offer doesn’t really matter unless it appraises for that value.
So let’s say the bank has the appraisal done, which you’re paying for, and the appraisal comes back at $450,000 and you made an offer of $500,000. Well, there’s a $50,000 gap there. Now, if the seller is not willing to negotiate with you and lower that price to the $450K, or maybe come a little closer, maybe you cover the gap of maybe $5,000 or $10,000 in order to make the deal work. Then you can’t come to a common ground, and it might be a good reason for you to go ahead and cancel the contract. You should never pay well above what the home is worth and what it appraises for.
Unless you are an experienced investor, you’re going to flip a property, you know your numbers, or something like that, as a first time home buyer, you should be paying what the home appraises for. So if the home doesn’t appraise at your offer price and the seller is not willing to negotiate, it might be a good reason for you to go ahead and cancel the contract.
Now the third good reason why you should cancel a contract is if you no longer qualify for the loan. When you get your offer accepted it’s based on numbers and interest rates that were done when you first started your house hunting process. If you’ve been in the house hunting process for a long time, obviously you’ll get that refresh with your lender, and you should never be more than 60 days out from at least knowing what current rates are and what your expected payments will be.
If you’re in the middle of escrow and you find out that your rate has jumped significantly, or home insurance is a lot more than what was expected, and you might not be able to qualify for that home anymore, this is a good reason to get out of your contract. You do not want to buy a house that you can’t afford, and the bank won’t let you buy a house that you can’t afford if you’re getting a loan.
So consider where you’re at. Where are your finances? How affordable is this home? You don’t want to live to pay the mortgage. It’s okay to stretch yourself. It’s okay to be a little concerned about paying the mortgage. Oftentimes when you’re buying a home as a first time home buyer, you get a little worried about being able to pay the mortgage. That’s fine. That’s not what I’m talking about here. I’m talking about if the bank says you no longer qualify because the payments are going to be X amount and you don’t make enough, that’s a good reason to cancel your contract.
Back out during that contingency period and explain to your agent, let your agent know that this is why I’m canceling. So it’s not just for any given reason. You have a good cause and good reason to cancel that contract and not put yourself in a position to where you have to foreclose just a year down the road.
So think about that. The home has to be affordable. You have to be able to pay this mortgage for the given 30 years. I know the average person moves out every 7, but just set yourself up to be able to afford it for 30. You want to make sure you’re in a good position financially to buy this house.
So if you do cancel your contract, what happens? Well, if you cancel within that contingency period in your contract, then you get your earnest money deposit back and you go house hunting again. If you can no longer qualify for this house then maybe you have to buy something a little more affordable, but you get your earnest money deposit, which is important. If you’re considering canceling your contract after the contingency period, well, now your earnest money deposit is at risk. The seller has access and a right to take your earnest money deposit because you’re no longer performing as you should.
That seller’s agent will deliver a notice to perform, and you have to take action that’s defined in that notice within a certain amount of time, typically within 48 hours. So you want to make sure that if you’re deciding to cancel, do it during the contingency period. Don’t put your earnest money at risk and even open yourself up for a potential lawsuit down the road.
Who knows what that seller had planned? Maybe they already are purchasing another home. Maybe they’re moving out of state. They already have some plans lined up and so it becomes a real inconvenience for you to cancel your contract with just a few days left of escrow.
Aside from potentially losing your earnest money deposit, you may not be able to qualify for another home. If you cancel the contract, things change. Your approval is not guaranteed, so you have to consider that if you do not move forward and purchase this home, can you still buy a home when you back out of this contract?
The worst thing that happens for you is to be lined up with a few days left of escrow to close to become a first time home buyer, you get cold feet, and you cancel the contract. You lose your earnest money and now you’re not even able to buy a home. So now you’re stuck renting and the market moves up and you can no longer afford to buy.
So consider all things before you make the decision to cancel. Talk to your agent, talk to your lender, make sure that things are lined up and you’re in a position that you can still buy if you get out of this contract. If you don’t know a real estate agent or a lender in your local market and you need help finding someone, reach out to us. We can help you do that.
If you’re looking to create a plan to get started and buy your first home, that’s what we’re here for, so reach out to us, get started, and come up with a game plan. If you want to get started with Homeowner Prep, you can text the word START to 619-848-3700 or you can visit us on our website at www.homeownerprep.com/start from there, you can set up an initial consultation and you can even receive a referral to a local agent or lender in your area.
If you just have a general question or a scenario that you want to run by us, feel free to reach out to us on any social media platform. We’re on all of them and we tend to get the majority of our questions on our Instagram account @HomeownerPrep.
I hope you got some value from today’s episode. I hope you understand that there are good reasons to cancel, there’s a timeframe to cancel, and you have to think about the long term effects of you deciding to cancel. I look forward to providing you with some more great content on the next episode, and until then… be blessed.
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