Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

How To Exit A Bad Real Estate Deal

Written by Paul Esajian

What options do investors have with regards to withdrawing from a real estate deal?

A bad real estate deal is something every investor strives to avoid. However, some poor real estate deals aren’t as obvious as you may think. Even the best investors have been known to enter into some pretty bad deals, but that doesn’t mean all is lost. It’s not impossible to remove yourself form a poor real estate deal, provided you give yourself some contingencies to exercise.

For beginner investors, an unsatisfactory deal can serve as a lesson on the importance of due diligence. More often than not, novice investors will get so caught up in the thrill of purchasing their first investment that they fail to follow the necessary steps in confirming the deal makes financial sense. While this may seem like the point-of-no-return, having already submitted an offer, there are still options available to back out.

Exiting A Bad Real Estate Deal: 4 Contingencies

Real estate deals

The best way to evade a bad investment situation is to have a plan in place from the beginning. This plan will also include a system for deal making, helping to ensure every deal (and offer) you make is up to par. As an up-and-coming investor, you’ll want a safety net in place while making multiple offers. A proven evaluation system will enable investors to overlook the physical allure of an investment property and concentrate on the numbers. This approach will not only increase the rate of real estate deals under your belt, but more importantly, the quality and profitability of each one.

That said, sometimes the unexpected can happen. Whether caught up in the excitement of buying a home or sudden change of heart in the eleventh hour, there are still options for investors. Here are four ways to back out of a bad real estate deal:

Contingency #1: Mortgage Approval

The inability to qualify for a real estate loan is one of the ways investors can back out of a bad deal. Traditional real estate contracts will have contingencies  based on mortgage approval, including a specific date in which you’ll be required to obtain financing, as well as terms defined in the contract. The loan contingency states the buyer is not bound to the contract if they fail to secure financing by a certain date. If conditions are not satisfied and you are unable to secure mortgage approval, you can more than likely back out of the deal, allowing you to receive your earnest money deposit back.

The one thing to consider when utilizing this strategy is the wording of the mortgage contingency. While all contracts are different, this contingency will generally include a deadline by which financing and mortgage terms are to be met. Investors are allowed to cancel the contract if they are unable to get a loan within the parameters set forth in the contract. It’s important to review how the loan contingency is written in your contract, with specific details on how it’s expected to be satisfied or released.

Contingency #2: Failed Home Inspection

Another contingency available for investors is the home inspection clause. The details will differ across the United States, but this particular contingency gives buyers the right to have a home inspection within a certain period, which will consist of someone examining the property and producing a report.

The home inspection contingency allows homebuyers to either approve the report and move forward with the deal or cancel the contract based on the results of the inspection. If the report is not satisfactory and repairs are recommended, a buyer can cancel if the seller either refuses to fix the issues or takes longer than the requested time period. Again, these factors can all change depending on the state, the contract language, as well as the stage of contract negotiations you’re in.

Contingency #3: Appraisal

A good way to keep out of a bad situation is an appraisal contingency. As part of the home buying process, a licensed appraiser will be required to visit the property and estimate its value. In return, this value will determine the maximum amount of money that can be loaned by the mortgage company. Because the lender may not agree to a loan over the appraisal price, there is typically an appraisal contingency in traditional real estate contracts that allows buyers to exit a deal in the event a home appraisal comes in low.

Contingency #4: Talk To The Seller

Sometimes the best way to end a bad real estate deal is to simply talk to the seller and request permission to exit. Although it’s not the ideal way to end a contract, this last ditch effort can provoke even the hardest of sellers to accept your cancellation. In many cases, it comes down to being honest with the seller and explaining your situation. They may empathize and tear up the contract or decide to renegotiate with you, depending on your reasoning for wanting out. Every situation, contract and seller is different, but honesty and integrity can go a long way in terms of helping you wiggle out of a bad real estate deal.

Leaving Behind A Bad Real Estate Deal 

The ability to exit from a bad real estate deal will depend on a variety of factors, but there are two more important than any others: the exact point you’re “in contract” to buy and what the contract language says about terminating the transaction. Additionally, the ability to withdraw from a real estate deal, including the options available, will differ from state to state. Therefore, it’s important to follow up with a real estate attorney to better understand your options.

Nevertheless, real estate investors will face an assortment of challenges and obstacles during their investing career; it’s inevitable. But as James Dean once said, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” Even in the worst of predicaments, successful real estate investors will always find a way to combat negative situations, whether that includes a “plan b” or establishing a way to prevent it all together.