How a Seller Can Cancel Your Short Sale Contract

Short sales are complex and difficult. Throwing a wrench into the process by canceling your short sale at the last minute would be upsetting to any buyer, especially a home buyer who was patient and loyal. It can happen, though.

Buyers Can Cancel the Short Sale Contract

Quite often, it's not the seller who cancels the short sale contract. It's the buyer. On the whole, most short sale listing agents don't care which buyer gets the home as long as the buyer is qualified and willing to wait through the short sale process.

Here are the reasons why a buyer may cancel the short sale contract by withdrawing the offer:

• Buyers might find a home they like better or a home that can close faster.
• Buyers may get cold feet, known as buyer's remorse.
• Buyers may have had no intention whatsoever of waiting for the short sale approval but instead made multiple offers on more than one home, taking the short sale that gets approved first.

Note: Some legal experts say it violates contract law for a buyer to submit more than one offer at a time if the buyer is unable to buy both homes.

Sellers Who Cancel Short Sale Contracts

Although it is more common for a buyer to cancel a short sale contract, sellers may have the right of cancellation as well. Sellers typically do not sign a purchase contract without specifying that the contract is subject to lender approval of the short sale.

In California, buyer's agents generally attach a "short sale addendum" to the purchase contract. The short sale addendum specifies that the entire transaction is contingent upon lender approval. Moreover, banks are under no obligation to approve a short sale.

My legal sources say that if the bank decides to accept a second offer from Buyer #2, the short sale contingency with Buyer #1 fails, and the transaction with Buyer #1 is terminated.

Here are ways a seller can cancel a short sale contract:

• A seller may decide to cancel the listing, and the listing agent will agree.
• A foreclosure may take place, preventing the short sale.
• The seller may be able to accept a higher offer and cancel the first offer. 

How Buyers May Prevent Sellers From Canceling the Short Sale

Although it rarely happens, sometimes sellers get cold feet and change their minds about selling. In that event, a buyer who holds a signed purchase contract should seek the advice of a lawyer.

The best thing a buyer can do is read the short sale purchase contract and, if attached, the short sale addendum. A buyer may wish to talk with a lawyer as well. Basically, if the short sale addendum includes verbiage that lets the seller continue to market the property and allows for all offers to be submitted to the bank, the bank can elect to accept an offer at any time that is higher than the first buyer's offer.

Many buyers believe the short sale addendum protects their earnest money deposit and lets them start a home inspection after short sale approval, which it does, but they don't read the fine print.

The fine print often favors the seller. If a buyer finds such verbiage objectionable, a buyer may very well insist that the clause is removed in its entirety from the short sale addendum. Although it doesn't happen very often that a seller will kick out a buyer under contract in favor of a higher offer, it can happen in a short sale. Generally, a seller is not that vested in which buyer closes escrow unless there is a tax consequence.

For more short sale legal advice, please talk to a real estate lawyer.