Backing out of a real estate contract usually costs you your earnest money deposit, and in some cases it can cost much more. If you cancel under a contingency your contract allows, you walk away clean. If you cancel for any other reason, the seller typically keeps your deposit, and depending on your contract language, may be able to sue you for the difference between your price and what the home eventually sells for, or even ask a court to force you to complete the purchase.
Contingencies Are Your Clean Way Out
Every well-drafted purchase agreement contains contingencies, which are conditions that have to be met before the sale becomes final. Cancel while a contingency is still live and still unmet, and you keep your deposit. The common ones:
- Inspection contingency, which lets you cancel or renegotiate if an inspection turns up serious defects the seller won’t fix or credit.
- Financing contingency, which protects you if your mortgage is denied or you can’t secure a loan in time.
- Appraisal contingency, which applies when the home appraises below the purchase price and your lender won’t cover the gap.
- Title contingency, which covers liens, boundary disputes, or other claims against the property.
- Home sale contingency, which makes the deal conditional on you selling your current home first.
Every contingency has a deadline. Let the inspection period expire without formally objecting, and you’ve waived that exit. Once all contingency deadlines pass, you’re committed. Missing a deadline can be as costly as never having the contingency in the first place.
There Is No Three-Day Right to Change Your Mind
A common misconception is that buyers get three days to cancel after signing. That three-day right of rescission exists under the Truth in Lending Act, but it applies to refinances and home equity loans on a primary residence, not to purchase mortgages. The statute explicitly exempts transactions used to acquire a principal dwelling.
Once you sign and your contingencies are gone, you’re bound. A few states allow brief cancellation windows in narrow circumstances, such as certain new-construction sales, but these are exceptions. Don’t assume recency alone gets you out.
You Lose Your Earnest Money Deposit
When you make an offer, you typically put down an earnest money deposit to show the seller you’re serious. It generally runs between 1% and 3% of the purchase price and is held in escrow by a neutral third party like a title company or brokerage until closing.1PNC. What is Earnest Money and How Much Should You Expect to Pay? On a $400,000 home, that’s $4,000 to $12,000.
Back out for a reason not covered by a contingency, and the seller typically keeps it. This is the most common consequence of walking away, and for many buyers, the only one. The deposit compensates the seller for the time the property sat off the market while tied up in your contract.
When Both Sides Claim the Money
Disputes get messy when buyer and seller both believe they’re entitled to the deposit. The escrow holder won’t pick sides. The funds freeze in place until there’s either a mutual written release or a court order. If neither party backs down, the escrow agent can file an interpleader action, deposit the money with the court, and let a judge sort it out. The agent’s attorney fees often come out of the deposit itself, so both parties lose a slice before anyone wins.
Liquidated Damages Clauses Cap Your Exposure
Contract language matters more than most buyers realize. Many residential purchase agreements include a liquidated damages clause, which is a pre-agreed cap on what the seller can collect if the buyer breaches. Where this clause exists and both parties have initialed it, the seller’s only remedy for a buyer’s default is keeping the earnest money. No additional damages. No specific performance.
That’s a significant protection, and it’s worth confirming before you sign. Without a liquidated damages provision, the seller can pursue more aggressive remedies. With one, your worst-case financial exposure is the deposit you’ve already put down. States handle these clauses differently, and some contracts leave the provision optional rather than automatic, so read the contract carefully and ask your agent or attorney about it.
When the Seller Can Sue You for More
If your contract has no liquidated damages clause, or the clause wasn’t properly executed, the seller has two serious legal tools beyond keeping your deposit.
Specific Performance
Courts treat real estate as fundamentally unique because no two parcels of land are exactly alike. That principle means a seller can ask a court to order you to complete the purchase on the original terms. Not every state allows sellers to pursue specific performance, and the seller must prove they were ready and able to close, but it remains a real possibility in many jurisdictions.
Monetary Damages
The more common lawsuit seeks money. The standard measure is the difference between your contract price and the property’s fair market value at the time of your breach. If you agreed to pay $450,000 and the home’s market value had dropped to $420,000 by the time the seller relisted, the seller’s claim starts at $30,000. Some sellers also pursue carrying costs they incurred while the property sat unsold: mortgage payments, property taxes, and insurance.
One important limit: the seller has a legal duty to mitigate damages. That means taking reasonable steps to minimize losses after your breach, such as promptly relisting at a fair price. A seller who lets the home sit vacant for months without listing it, or who rejects reasonable offers, weakens their damage claim. If you’re defending a breach lawsuit, failure to mitigate is one of the strongest arguments you have.
If the Seller Is the One Backing Out
Sellers breach too. Maybe they got a better offer, maybe they changed their mind about moving. When that happens, the buyer has the same basic remedies in reverse.
The buyer’s strongest tool is a lawsuit for specific performance to force the sale. Courts are actually more receptive to this when a buyer brings the claim, because the buyer was trying to acquire a unique property that money alone can’t replace. The buyer has to show they were ready, willing, and able to close.
Alternatively, the buyer can sue for monetary damages, measured by the difference between the contract price and the property’s fair market value at the time of breach. A locked-in price of $350,000 on a home now worth $390,000 would put the baseline claim at $40,000. On top of that, buyers often have out-of-pocket losses that are harder to recover: temporary housing, storage fees, inspection and appraisal costs, rate-lock fees, and committed moving expenses.
Freezing the Property With a Lis Pendens
If you suspect the seller is about to close with someone else while you prepare to sue, you can file a lis pendens in the county land records where the property sits. That filing puts the world on notice that the property is subject to ongoing litigation. Title companies will generally refuse to insure, lenders won’t fund a new purchase, and most buyers will walk away. The property is effectively frozen until the litigation resolves or the lis pendens is removed.
Check Your Contract for a Mediation Requirement
Before anyone files a lawsuit, check the contract for a mediation or arbitration clause. Many standard real estate purchase agreements, especially those drafted by state Realtor associations, require the parties to attempt mediation first. A neutral third party helps both sides negotiate a resolution, and it’s far cheaper and faster than court.
Skipping mediation when your contract requires it can backfire. In some contracts, the party who refuses mediation forfeits the right to recover attorney’s fees later, even after winning in court. That’s a strong incentive to try mediation first.
Tax Treatment of a Forfeited Deposit
Lose your earnest money on a personal home purchase and you cannot deduct the loss. IRS Publication 530 lists forfeited deposits, down payments, and earnest money among nondeductible expenses related to a personal residence. The IRS treats failed personal home purchases as nondeductible personal losses.
Investment or rental property is different. If you forfeited a deposit on a property you intended to rent out or hold as an investment, you may be able to report the loss as a capital loss on Schedule D. The cost basis is what you deposited, the sale price is zero, and the holding period is how long the money sat in escrow. Capital losses can offset capital gains and up to $3,000 of ordinary income per year, with any excess carrying forward.
Why Most Breaches Never Reach Court
The economics discourage most lawsuits. Filing fees for a civil breach of contract case run a few hundred dollars, but attorney fees are where the real cost sits. Real estate litigation attorneys commonly charge $150 to $500 or more per hour, and even a straightforward case can need dozens of hours of discovery, motions, and trial prep.
For a seller, the math often doesn’t justify going beyond keeping the deposit. If the deposit was $8,000 and pursuing more damages would cost $15,000 in legal fees with no guarantee of collection, most sellers relist and move on. For a buyer facing a seller breach, the decision turns on how much the property has appreciated and whether comparable alternatives exist. The threat of litigation often matters more than the lawsuit itself, which is why most breached real estate deals end at the negotiating table.