If you back out of a home purchase after the due diligence or inspection period has concluded, you will typically forfeit your earnest money deposit. This deposit, often held in escrow, serves as a good faith gesture when an offer is made and is at risk if the buyer defaults on the contract.
Understanding the Due Diligence Period
The due diligence period, also known as the inspection period, is a crucial timeframe within a real estate contract. During this phase, the buyer has the opportunity to thoroughly investigate the property, conduct home inspections, review disclosures, and ensure the property meets their expectations. If significant issues are discovered or the buyer simply decides not to proceed for a valid reason stated in a contingency, they can usually back out of the contract without penalty and have their earnest money returned.
Consequences of Withdrawing After Due Diligence
Once the due diligence period has passed, the contract usually becomes "non-contingent" or "hard," meaning the buyer has waived many of their rights to cancel the contract without penalty.
- Forfeiture of Earnest Money Deposit: The most common consequence is the loss of your earnest money deposit. This money is then typically released to the seller as compensation for their time and the property being off the market. The amount of earnest money can vary but often ranges from 1% to 10% of the home's purchase price.
- Potential Legal Action (Less Common): While less common for residential real estate transactions where earnest money forfeiture is the standard remedy, sellers could potentially sue for specific performance (forcing the buyer to complete the purchase) or for additional damages, especially if the forfeited deposit doesn't adequately cover their losses. However, this usually happens only in unique circumstances or if the forfeited amount is very small compared to the seller's actual damages.
Exceptions: Remaining Contingencies
Even after the initial due diligence period, certain contingencies might still be active, allowing a buyer to back out without losing their deposit. The most common of these is the financing contingency.
- Financing Contingency: If you are financing the home, your contract most likely includes a financing contingency. This clause protects you if your lender denies your loan application, or if the home's appraisal comes in significantly lower than the agreed-upon purchase price, impacting your loan approval. If you are unable to secure financing through no fault of your own, you can typically terminate the contract and receive your earnest money back, even if other due diligence periods have passed.
- Other Contingencies: Depending on your specific contract, other contingencies might exist, such as an appraisal contingency (if distinct from financing) or a title contingency, which could also allow for a penalty-free exit under specific conditions.
Summary of Outcomes
The outcome of backing out largely depends on when you withdraw and what contingencies are active in your contract.
| Scenario | Typical Outcome |
|---|---|
| Within Due Diligence Period | Earnest money returned, no penalty. |
| After Due Diligence Period | Forfeit earnest money deposit. |
| After Due Diligence, but Financing Fails | Earnest money returned, no penalty (if financing contingency is active). |
| Contract without Contingencies | Forfeit earnest money deposit. |
Practical Advice
- Read Your Contract Carefully: Always understand all terms, dates, and contingencies outlined in your purchase agreement before signing. This includes due diligence deadlines and conditions for earnest money return.
- Communicate Promptly: If you're considering backing out, communicate your intentions and the reasons clearly and promptly in writing to the seller and your real estate agent.
- Consult Your Agent and Attorney: Your real estate agent can help clarify contract terms, but for legal advice, always consult with a qualified real estate attorney. They can explain your rights and obligations, especially when dealing with complex situations or potential forfeitures.
For more information on real estate contingencies and contracts, you can refer to resources like Nolo or Investopedia.
