When can you back out from buying a home in Oregon?
Being a buyer’s agent in real estate transactions, I often get asked these questions. It is a legitimate and a very important question for home buyers. It is also a very broad question that comes with many different answers in both black / white and gray areas. So the question is, “When can I cancel my contract to buy a home after I already signed it?” A quick answer is that there are many scenarios where you can as a home buyer and it depends on your situation and what the contract says. In real estate transactions, there are so called “contingencies”, which allow the transaction to cancel and the buyer will receive the full earnest money back from the seller if the contingency or the condition does not occur. The big three contingencies are based on 1) home inspection, 2) financing, and 3) title condition of the home. You must carefully read the language in your contract to understand which situations you can back out of a deal and still receive the refund of your earnest money. In Oregon, most sales agreement forms used in real estate transactions are pre-printed by Oregon Real Estate Forms, LLC and they tend to be very buyer friendly. Real estate agents use these forms to fill in and create addendum in a typical transaction. Real estate agents and brokers are prohibited from drafting their own contracts so they always must use these pre-printed forms. However, if your transaction was handled by an attorney, the contract may look different from the ones made by Oregon Real Estate Forms, LLC. So for the purpose of this article, I will reference the language of the pre-printed forms from OREF since it is the most likely that you will end up using that form as a home buyer in Oregon.
One of the first things a buyer’s agent arranges for the buyer after a contract is signed is home inspection. You have 10 days for home inspection unless you state more days on the contract. Having a professional home inspection done on the property you are about to purchase will truly reveal conditions of the home that are both obvious and latent. Having a home inspection done is usually the buyer’s responsibility and the buyer can choose which home inspection professional to do the job. It only makes sense that you hire an unbiased professional of your choosing.
After you receive the inspection reports, you are not totally happy with it. There are some minor issues with the home. Most homes have minor issues. But are these minor issues enough for you to back out? According to the pre-printed forms in Oregon, they are enough for you to cancel the contract and receive all your deposit back. The buyer’s disapproval of any of inspection report(s) is “unconditional” according to the contract. You must, however, notify the seller in writing your disapproval of the inspection report by 5:00 P.M. of the final day of the stated inspection period or the buyer shall be deemed to have accepted the condition of the property.
When there are issues with inspection reports, buyers often ask the seller to fix these problems before closing instead of backing out from the deal if the problem is fixable. Most sellers are willing to fix the problems because they want to sell the house and they will be legally required to disclose any defects whether obvious and latent once they find out about them in their next transaction. So that means, if the buyer’s disapproval of the issue is reasonable, most sellers will want to fix the problems for the buyer because the seller will have to fix it for the next buyer if he/she refuses to fix it this time.
After Failure to Obtain Financing
After you sign the contract, the deal will only go through if you are able to secure financing. That is called financing contingency. Real estate agreements used to and still use the language “This contract is subject to financing”, which created a lot of confusion and lots of court cases fighting over the meaning of the language. The OFEF forms have done a great job explaining what this contingency means on the contract. Basically, it says if the buyer receives actual notification that any financing contingencies identified above have failed or otherwise cannot occur, the buyer shall promptly notify the seller and the parties shall have two business days (unless otherwise filled in) since the notification to cancel the contract and for buyer will receive the earnest money back. Further, the contract states that 1) the buyer will apply for a loan within 3 business (unless otherwise filled in) days after the contract is signed; 2) the buyer shall make a “good faith effort” to secure financing; and 3) the buyer has the money for the earnest deposit and down payment. One question that has been an issue of litigation in this area of financing contingency is whether the buyer can back out if the mortgage terms turned out to be unfavorable. The contract does not provide this language specifically but there is a section where you can describe the buyer’s preferred range of mortgage terms including interest rates, 30 year / 15 year term, or types of loans (FHA, VA, or conventional). A good real estate agent must help the buyer specify these terms on the contract. In the absence of these terms, however, most courts have held that the financing contingency often means that a buyer obtaining financing terms unobjectionable to a reasonable person. It sounds buyer-friendly but it’s still gray. The best practice is to specify this on your contract.
After Title Report Showing Defects
Real estate transactions are subject to a buyer’s review and approval of a preliminary title report and the recorded CC&Rs showing the condition of title to the property. It is the seller’s responsibility to order such report and the buyer has five business days to object in writing the defects in the title and if the seller fails to provide a written assurance that those defects will be removed or corrected by closing, the buyer can cancel the contract and receive the deposit back. Even if the buyer fails to timely object these items, the seller must still provide a marketable title prior to closing. Basically, buyers have a right to a marketable title prior to closing including a right to seller’s written assurance that defects will be fixed and sellers have a right to cure defects prior to closing. Refer to my previous article about what constitutes a marketable title in Oregon. Moreover, it is typical that a seller provides a title insurance for the buyer on top of a statutory warranty deed. A statutory warranty deed is less protective of a general warranty deed but it basically provides covenants that the seller (grantor) has the title without known encumbrances to the title and will defend the buyer (grantee) on the title. The covenant only covers as far as problems during his/her ownership of the property. It doesn’t protect from any title defects that could have happened during the prior ownership of predecessors, unlike the general warranty deed. So it became customary that sellers also provide a title insurance so that the policy will pay for settlements of any title disputes that may arise.
It is buyer’s rights to receive a marketable title (not a clear and perfect title) and it means the buyer should be free from future lawsuits due to title defects. Title defects usually include liens on the property. The biggest lien is the seller’s mortgage, which will be removed at closing. Other liens and encumbrances could include judgment liens, utility liens, tax liens, property encroachment, and zoning violation that the seller could or could not fix prior to closing. Liens can be paid off by the seller but the buyer should consider backing out on issues like major encroachment and zoning violation that cannot be fixed. Moreover, watch out for private easements. Easements survive sale of the affected subservient property and can only be extinguished in certain ways that are difficult. Utility easements are common and they don’t render a title unmarketable. But a private easement could make it unmarketable whether it is an easement appurtenant or in gross. If you run into title issues, you should talk to a real estate lawyer.