After Home Inspection, We Want Out of the Purchase. Can We Get Earnest Money Back?

If your contract contains an inspection contingency and the applicable deadline hasn't passed, the seller should return your earnest money deposit.

By , Attorney · UC Berkeley School of Law

After putting in an offer on a supposed dream house, too many home purchasers are dismayed, after hiring a home inspector to evaluate the place and prepare a report, to learn that it's got problems. If those problems are big enough; for example, the house needs new a new electrical system, has major foundation cracks, or has a high radon reading; they might simply want out of the purchase contract. The question is, if they back out now, will they be able to get their earnest money deposit back? This article will discuss:

  • how to determine your rights according to your purchase agreement, and
  • how you can back out in a way that gets your earnest money back.

The key, as we'll explain, is whether your contract included an "inspection contingency." This contingency conditions the closing on your receiving and being satisfied with the result of one or more home inspections.

Does Your Purchase Contract Include an Inspection Contingency?

Particularly in tight "sellers' markets," it's common for buyers to waive the inspection contingency or for houses to be sold "as-is." Some buyers are willing to forego an inspection contingency in order to get a house for a low price, or to be chosen over other offerors.

If you made that choice, then backing out of your purchase contract will be considered a breach of contract, and you might not be able to get your earnest money back. Still, this is a matter for negotiation between your agents. If, for example, there are signs that the home sellers hid major problems before putting the house on the market, they might be shamed into giving you back your money.

If you're reading this and haven't yet entered into a purchase contract, take this as a lesson. You'll want to carefully consider whether to give up the inspection contingency. Otherwise, your earnest money could be at risk if you back out because of an inspection item.

Check Your Contract After Receiving an Alarming Home Inspection Report

It's disappointing to find out that what you thought was your dream house is actually a potential nightmare. However, this is actually the whole point of the home inspection. Most of the time, the purchase contract will contain an inspection contingency, which allows you an "out" if, after completing your home inspection, you decide the house just isn't right for you.

Read your purchase contract carefully and determine when the deadline is for your home inspections to be complete. Assuming that you are still within that deadline, you should then read the contract to determine how you must go about telling the seller that you wish to back out of the contract.

Does Your Reason for Backing Out Need to Be a Major Problem?

One of the best things about the home inspection contingency in a purchase contract is that, in most contracts, it is a highly subjective contingency. In other words, the buyer most likely has the option to back out of the contract prior to the inspection deadline for nearly any reason: the house smells funny, it turns out that there isn't a sprinkler system, or the buyer just feels the house has bad juju.

This might not be the case with all purchase contracts, so read yours carefully. But if you are using a state-approved form for the purchase, you will in all likelihood be able to back out of the contract before the inspection deadline for a wide range of reasons. After all, before putting in an offer, most buyers only see the house once or twice. The inspection contingency allows buyers to be more circumspect and get more of a feel for the house before entirely committing.

Notifying the Home Seller That You Wish to Cancel the Purchase

If yours is like the typical home purchase contract, you must notify the seller in writing before the deadline. Some states will have forms specific to this issue that you can use to inform the seller that you're backing out. So long as you notify the seller of your intent prior to the deadline and by the method specified in the contract, you should get your earnest money back in full.

If you are past the inspection deadline, though, it is possible that your earnest money might not be refundable. Speak to your real estate agent and, if necessary, a real estate attorney for a full analysis.

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