Can You Back Out of a New Construction Home Contract?

back out new home contract

No, you cannot back out of a new construction home contract, because it is a legally binding contract between the builder and the buyer. However, there are some options for the buyer to take on a loss and move on without the new build.

It’s common to see people wanting to back out of a new construction home contract. It happens with many new construction developments. A new construction home buyer needs to read the contract in detail before signing it – understanding the ways in which the buyer and builders are protected. As these purchase agreements are written by the builder’s lawyers – they will be highly favorable to the builder. In some cases, a home builder can cancel a contract as well.

Backing Out of New Construction Home Contract 2022

When you’re thinking about pulling out of a new build house, it can seem like a scary endeavor. The truth is – it can be, depending on many factors. A home buyer needs to take the following factors into consideration when deciding to get earnest money back on new construction:

  • How far are you into the project?
  • Has ground been broken yet?
  • Have you made structural or finishing upgrades?
  • How much earnest money has been deposited?
  • Has the market gone up or down in your development?
  • Will you qualify for your mortgage at closing?

Most Important Consideration: If you back out of a new construction home contract, or stop paying for your new build deposit – your build can come after you for the remaining earnest money. There is a legally binding contract between you and the builder that you have signed. This purchase agreement is your commitment to fulfilling the details in the contract.

A builder spends thousands of dollars creating purchase agreement contracts – and it’s meant to cover them in cases where the buyers back out. It’s never as easy as stopping your payments, and hoping the builder will be okay with it.

The majority of builders will have the option to extend the closing, which will come at a premium to you (you will get charged for this, and it’s not cheap). We recommend reading about some of the hidden costs of buying a new construction home.

When is it Too Late to Back Out of Buying a House?

It is too late to back out of buying a house once you have signed the purchase agreement or sale agreement. Once the legal documents are signed, there is a legally binding contract that cannot be broken without consequences.

Whether it’s a resale or a new pre-construction home from a builder – the contract has all the information you need to make an informed decision. Sometimes, the advice of a lawyer is needed. Why? Because the contract can indicate what options are available.

What Are My Options to Back Out of a New Home Construction?

These options are not all the same and they may not be acceptable to every builder. These are just the common options that new home buyers have resorted to. You will always need to seek advice from your lawyer before making an informed decision.

Talk to the Builder: Today, the real estate and new construction market for semi-detached homes is exceptionally hot. A grand collection of home builders have historically increased prices for their new build homes, as sales take place. A builder may be willing to work with you to let you off the contract if you agree to lose the earnest money.

If you haven’t broken ground and no structural and finishing upgrades have been purchased, there is more room to negotiate with your builder. If the market is priced a little higher than when you purchased the build – it may work in the favor of the builder. In an appreciating market, the builder can still sell your build to someone else (considering they have people ready to buy) and let you off the contract.

A development that is close to closing will be hard to get out of – because a ton of work has already gone into the project. If the upgrades you made are not popular with today’s buyers, it may be even harder to unload the property with the builder. A home builder may still be willing to work with you to get you off the contract – but you stand to lose even more money since by now; you would’ve made a 10% – 20% deposit.

In this option, you stand to lose any deposits you have made for the home. If a contract is being voided/nulled – get it in writing.

Pre-Construction Assignment Sale – In this case, you are selling your contract to purchase a pre-construction build. At this point, there is no name on the title. There is only a contract – and the contract is being sold in this option. A pre-construction project may include an assignment sale right/option. You are required to review this with your lawyer. There are many assignment sales that occur in Canada – because plans change, people change their minds and some may just get cold feet.

A pre-construction assignment sale is an option that can get you out of a new construction contract. If you have an assignment clause in your contract that lets you sell the contract – you are in luck. Keep in mind, that an assignment sale can be valued higher or lower than the purchase price of your new build.

Example #1 – Market Appreciates – If the market has improved and your “contract” has appreciated in value, it can lead to extra cash in your pocket. For example, if your pre-construction build was originally purchased for $540,000 and you deposited $108,000 (20% deposit) – you are into the deal for 108k so far. However, if the market has appreciated and your contract is now worth $575,000 – you will receive $143,000 ($108k + $35k appreciation). This sum of $143,000 is paid to you over a scheduled period (discussed between the assignor and assignee + lawyers). The new owner of the contract will obtain financing or pay cash for the remaining $432,000 ($575k – $108k – $35k).

Example #2 – Market Depreciates – This is essentially the opposite of what we discussed above. The value of your new build drops, and you’re now required to eat the loss in the assignment sale.

A new home contract cancellation is possible, but it ultimately depends on the builder’s willingness to work with the home buyer.

If you decide to continue with your new home build contract, you can close and keep the property – whether this is for you to live in, or rent out. Keep in mind when you have to start paying for a new construction home.