Can You Pull Out of Escrow?

When a real estate transaction moves forward, funds and documents are often held by a neutral third party in what is known as escrow. This arrangement safeguards both the buyer and seller by ensuring that no assets change hands until all agreed-upon conditions of the sale are met. While a signed real estate contract represents a binding agreement, specific circumstances allow a party to withdraw from escrow. Understanding the foundational document that governs these transactions is the first step in comprehending the conditions under which such a withdrawal is possible.

The Role of the Purchase Agreement

The purchase agreement, also referred to as a sales contract or real estate contract, is the legally binding document that outlines the entire real estate transaction. It establishes the terms and conditions that both the buyer and seller must adhere to, including provisions for withdrawal from escrow. This comprehensive document details the property’s legal description, the agreed-upon purchase price, and the amount of earnest money deposited by the buyer.

The purchase agreement also specifies the closing date. It incorporates clauses known as contingencies, which define conditions that must be met for the sale to proceed. These contingencies dictate when a buyer or seller can withdraw from the agreement without significant penalties. Understanding this document is important for anyone involved in a real estate transaction.

Common Contingencies for Withdrawal

Real estate contracts include contingencies that allow a party to withdraw from the agreement under predefined conditions without penalty. These clauses protect buyers and sellers from unfavorable transactions due to unforeseen issues. Each contingency has a specific timeline for its conditions to be met, and adherence to these periods is important. Common contingencies include:

Financing Contingency: Allows termination if the buyer cannot secure a mortgage loan, typically within 30 to 60 days. If denied, the buyer can withdraw and receive their earnest money back.
Appraisal Contingency: Makes the sale dependent on the property appraising for at least the purchase price. If the appraisal is lower, the buyer can renegotiate or terminate.
Inspection Contingency: Grants a period, often 5 to 10 days, for a professional home inspection. If significant defects are found, the buyer can request repairs, negotiate a price reduction, or cancel.
Title Contingency: Ensures the seller can convey a clear title, free from liens or disputes. If unresolved problems surface, the buyer can withdraw.
Sale of Prior Home Contingency: Permits termination if the buyer’s existing property does not sell within a specified timeframe, often 1 to 3 months. Sellers may view offers with this contingency as less appealing.
Due Diligence Contingency: Provides a broader period for the buyer to conduct investigations like reviewing zoning laws or environmental factors. If findings are unsatisfactory, the buyer can withdraw.

Ramifications of Withdrawal

Withdrawing from an escrow agreement carries different consequences depending on whether the withdrawal occurs with or without a valid contractual contingency. When a party withdraws due to a timely and properly invoked contingency, the financial ramifications are minimal. In such cases, the earnest money deposit, which is a sum of money held by a neutral third party to demonstrate the buyer’s good faith, is returned to the buyer. This return is a protection offered by contingencies, allowing buyers to exit a deal if specific conditions are not met.

However, if a party withdraws from the purchase agreement without a valid contingency or outside the stipulated timelines, it constitutes a breach of contract. In this scenario, the breaching party, most often the buyer, risks losing their earnest money deposit. Earnest money serves as liquidated damages, meaning it is the agreed-upon amount of compensation the seller receives if the buyer defaults. These deposits range from 1% to 3% of the purchase price.

Beyond the loss of earnest money, a breach of contract can lead to further legal liabilities. The non-breaching party might choose to sue for monetary damages, seeking compensation for financial losses incurred due to the failed transaction. For a seller, these damages could include the difference between the original contract price and a lower price if the property sells to another buyer, along with holding costs.

The non-breaching party might pursue specific performance, a legal remedy that compels the breaching party to fulfill the terms of the original contract. This is more commonly sought by buyers in real estate transactions because each property is considered unique, and monetary damages may not fully compensate for the loss of a specific parcel. While less common for sellers, a court could potentially order a buyer to complete the purchase. A breach can also negatively affect a party’s reputation in the real estate community, potentially impacting future transactions.

Navigating a Withdrawal

When a decision is made to withdraw from an escrow agreement, whether due to a valid contingency or another reason, specific procedural steps must be followed to formalize the action. The most important step is providing formal, written notice to all involved parties. This includes the other party to the contract (buyer or seller), real estate agents, and the escrow officer. Verbal notification is considered insufficient and does not meet contractual requirements.

The written notice must be delivered within the precise timelines specified in the purchase agreement for the relevant contingency or withdrawal clause. This adherence to deadlines is important to ensure the withdrawal is legally sound and to protect the party’s right to any earnest money refund. Accompanying the written notice, any required documentation supporting the reason for withdrawal should be provided. For example, a loan denial letter would support a financing contingency withdrawal, or an inspection report would support an inspection contingency withdrawal.

Navigating a withdrawal involves the release of the earnest money deposit. Both the buyer and seller must sign a release form to authorize the escrow holder to disburse these funds. If there is a dispute over the earnest money, the funds may remain in escrow until the parties reach an agreement or a court provides a ruling. Maintaining clear and professional communication with all parties throughout this process can help facilitate a smoother resolution and minimize potential disputes.