The contract has been signed. Then something comes up and now you have a change of heart, or perhaps your financing has hit a snag. In any case, it appears to be too late, the deal is signed.  

You then ask... 

“Can I back out of my purchase contract after it was signed by the seller?"

The short answer to this question is YES!*

Within the standard Arizona contract an itself are contingencies built in that allow you to back out of the contract without a penalty. The contingencies in the contract may include inspection and due diligence, appraisal, and financing. 

Inspections Uncovered Property Damage

A standard Arizona purchase contract allows for a buyer to rescind an offer to purchase a home if, during the inspection period, the buyer discovers damages to the property. The damages could be something as simple as doors not closing properly or as serious as structural issues with the foundation.  

Once discovered, a buyer may choose to cancel a contract or send an inspection report allowing the seller to resolve the issues.  The general language most often used in Arizona residential real estate transactions states,

“Buyer Disapproval: If Buyer, in Buyer’s sole discretion, disapproves of items as allowed herein, Buyer shall deliver to Seller notice of the items disapproved and state in the notice that Buyer elects to either: immediately cancel this Contract and all (1) Earnest Money shall be released to Buyer . . .”

See Arizona Purchase Contract, Association of Realtors, pg. 6.  If the above clause is not altered by an additional addendum, the buyer may cancel the contract and recover his or her earnest money.

Unable to Obtain Financing

In addition to the inspections exception, the Arizona purchase contract also allows a buyer that, after a good faith attempt, has been unable to obtain financing to cancel the purchase contract and recover any earnest money placed in escrow. Again, the general language most often used in Arizona residential real estate transactions states,

“Unfulfilled Loan Contingency: This Contract shall be cancelled and Buyer shall be entitled to a return of the Earnest Money if after diligent and good faith effort, Buyer is unable to obtain loan approval without conditions by COE Date . . .”

See Arizona Purchase Contract, Association of Realtors, pg. 2. There are exceptions and cases interpreting both of the exceptions discussed above, however, in most cases the buyer is able to cancel the contract and obtain a full refund of any earnest money that is paid.

Found A Better Deal

Unfortunately, finding a better deal or getting a bad feeling about the house or neighborhood is insufficient reason in the law to cancel a valid purchase contract. That doesn’t mean that you are now left with no choice but to purchase the house. Depending on the terms of the purchase contract, a buyer that breaches a contract to purchase a property has liability only up to the amount of earnest money deposited.  This contingency is normally addressed in a liquidated damages clause that calls for the forfeiture of earnest money when a buyer breaches the contract. The parties contractually agree the seller’s damages are limited to the amount placed in escrow to hold the property for the buyer. If the buyer then walks away from the deal, the seller is made whole by receiving the earnest money. If the contract does not contain a liquidated damages clause, the seller may be entitled to bring suit and seek whatever damages have been endured as a result of the buyer’s breach.

Court’s are hesitant to enforce specific performance when a contract involves the purchase of a home. It is against public policy to force someone to purchase a house they do not want to own. As a result, the damages are normally limited to monetary damages that can be proven by the seller.

Before deciding to breach a contract it is always best to speak to an attorney that has reviewed your specific contract and can advise you on the best course of action in your situation. It is not always possible to perform on a purchase contract, there are many reasons that you may need to cancel.

If you are considering canceling a purchase contract and need assistance, the attorneys at WELLS Law Group (licensed in Arizona) are available to answer your questions and assist you in the process.

* Assuming the contract is valid, the consequences of backing out of a purchase contract require a  longer, more complicated answer that is dependent on the terms of the contract and the factual circumstances that surround the reasoning for rescinding the offer; however, in most instances you may in fact cancel the contract and avoid moving forward with the purchase of the property.