Can you pull out of a house sale before settlement?

Having second thoughts about buying your first home? Not convinced you want to purchase that investment property? Or perhaps you just want to know there’s a way out if things don’t go to plan during property inspections.

Either way, you’re not alone. Getting cold feet when buying and selling property can be stressful. But it doesn’t have to be the end of the world. The good news is that there are ways you can pull out of the deal before real estate settlement.

However, it’s not always clear-cut. You may need to pay a financial penalty, and in some cases, you could also face legal repercussions.

But let’s not get ahead of ourselves. It all depends on which stage of the home-buying process you’re in. So, with that in mind, let’s dive in and take a look at the different stages and key considerations if you’re changing your mind about property ownership.

Can you pull out before settlement?

Need to pull the plug on your negotiations? You’re probably asking “am I allowed? Or am I trapped forever, doomed to purchase a property I no longer want?”

Not quite. The good news is that you can back out of a property purchase before settlement. The bad news is that you may face some consequences depending on which stage you decide to end negotiations.

So, let’s break down those stages and take a look at what you need to consider.

1. Before contract signing

If you haven’t signed any contracts, consider yourself scot-free. At this stage, you’ve committed nothing to paper and have no obligations. That means you’ll face no penalties under any circumstances if you decide to back out from the buying and selling negotiations. Phew.

2. After signing but before exchange

Once you’ve signed a contract, things get a little bit more complicated. But fortunately, there’s still room for negotiation if your financial representatives haven’t yet exchanged the contracts—the agreement isn’t yet legally binding.

This means you can usually negotiate your exit with the seller. That said, if you’ve placed a holding deposit to secure the property, you may lose this. You might also incur some legal costs if you’ve employed a solicitor or conveyancer to work on the contract.

But these costs are usually fairly minor. And as nothing is binding, there will be no legal repercussions at this stage. It’s simply a case of coming to an arrangement with your seller that is in the best interest of both parties.

3. After exchange (cooling-off period)

You and your seller’s solicitors have exchanged the contracts. What now? Do you now have legal ownership of the property?

Not quite. Many states have a mandatory cooling-off period. This is a window where your legal representatives will prepare for the property settlement by arranging contracts like disclosure statements, transfer documents, and promissory notes. At this stage, you can typically still withdraw from the property sale without facing legal repercussions.

The cooling-off period begins the day after both contracts are exchanged. It lasts two to five days (depending on your state) and ends at 5 p.m. on the day of settlement.

During that time, you can perform a final inspection of the property and withdraw negotiations. But know that you won’t necessarily make it out unscathed. Most states have a penalty for pulling out during the cooling-off period. Here’s what to expect.

Penalties for pulling out during the cooling-off period (by state)

NSW - 0.25% of purchase price.

QLD - 0.25% of purchase price.

SA - $100 of deposit.

VIC - $100 or 0.2% of purchase price (whichever is larger).

ACT - 0.25% of purchase price.

NT - No penalty. Full refund of deposit.

Why is there no TAS or WA? This is because Tasmania and Western Australia have no cooling-off period. Once you’ve signed the contract, you’re locked in. Let’s take a look at what that means.

4. After exchange (no cooling-off period)

States like Tasmania and Western Australia don’t have a cooling-off period. Signing the contracts means taking legal possession of the property—you’re fully committed. This also makes it far more challenging to back out. If you do so, you could face legal fees and financial penalties.

Renegotiating your contract

It’s safe to assume your seller would prefer you didn’t pull out of the contract. With that in mind, they’d appreciate it if you were open to negotiations. This could save you a lot of hassle, too.

Much of the time, your seller will be open to extending timelines slightly if it means you’ll go ahead with the deal. They may also be willing to reduce the price if financial assistance is the issue. Asking never hurts. If there are some circumstances that would convince you to buy the property, it’s worth letting your seller know before you pull the plug.

Related: House flipping in Australia: How to do it right

Other considerations that impact your ability to back out

Several other caveats make it harder or easier for you to back out of your negotiations. Let’s take a look.

Conditional vs unconditional contracts

Your ability to back out will be impacted by whether your contract is unconditional or conditional.

An unconditional contract means the sale of the home isn’t dependent on any conditions being met.

A conditional contract means conditions apply to the sale. You may have leeway to back out if certain conditions of the contract aren’t met.

For instance, if you sign a conditional contract that states the property must pass a building and pest inspection to the buyer’s satisfaction, the condition must be honoured. If it isn’t, the buyer’s agents can end negotiations with no legal and financial penalties, even after the cooling-off period.

However, if you sign an unconditional contract, you can only back out from this agreement without facing legal repercussions up until the end of the cooling-off period. Similarly, if every condition in your conditional contract is honoured, you can’t back out once the period is complete.

A note on conditional contracts

In all cases, it seems wise to opt for a conditional contract. After all, giving yourself a get-out-of-jail-free card if the pre-settlement inspection reveals a lot of unexpected problems is always a good idea.

But there’s a problem. The seller has no obligation to accept your conditional terms. And the more conditions you require, the higher the chance they’ll reject you outright.

This doesn’t mean a conditional contract is always off the table—but it does mean you might be hunting for a suitable property for longer. It all depends on your priorities.

Buying at auction

Things work a little differently when buying property at auction because ultimately winning the bid means taking legal ownership of the property. This is why many go to auctions to speed up the settlement process and receive the keys faster.

This streamlined process also means there’s no cooling-off period. If you win the bid, you’ll sign the unconditional contract of sale straight away—and that sales contract is legally binding.

Our advice? Never place a bid if you don’t have your mind made up. If you don’t have the finances to pay the deposit and become the owner of the property, stay well away. If you commit to something you can’t follow through with, you’ll face serious legal consequences and financial penalties if you back out.

Related: Where is the best place to buy an investment property in Australia?

What are the consequences of pulling out after the cooling-off period?

Once you’ve had time to ‘cool off’, it becomes far more difficult to back out. On the final settlement date, you’ll pay the balance remaining of the purchase price. After that, you’ll find it challenging to exit the deal unscathed and will usually face some pretty hefty penalties.

As always, the exact consequences will depend on your state and the commercial or residential property you’re buying, but here are a few potential problems you may encounter.

Financial penalties: At the bare minimum, you’ll lose the deposit you put down—usually 10% of the final price of the house. The seller is entitled to this amount by law. You may also be required to cover the seller’s expenses, such as the difference between your agreed price and their resale price.

Legal ramifications: As you’re breaching your contract by backing out at this stage, the seller might want to take legal actions to recoup some of the damages.

Credit score: A defaulted contract may negatively impact your credit score. This also applies if the seller sues for damages and you cannot pay. This might impact your ability to secure credit in the future.

Our advice is to do your due diligence early. Never leave it until the last minute to ensure you want to proceed. Pulling out before settlement day is always easier.

And in the worst-case scenario? Always consult with your solicitor if you need to back out after the cooling-off period. They may be able to offer some advice, help you secure a home loan, or support you as you navigate the situation.

Related: Guide to mortgage discharge fees in Australia

How long is the cooling-off period in each state?

For your information, we’ve provided a handy table below showing how long you’ll have to back out in each state. The period always starts on the day after you exchange property contracts and ends at 5 pm on the final business day.

State

Cooling-off Period

NSW - Five business days.

VIC - Three business days.

QLD - Five business days.

SA - Two business days.

WA - No statutory cooling-off period.

TAS - No statutory cooling-off period.

NT - Four business days (if not represented by a conveyancer or solicitor).

ACT - Five business days.

As we mentioned earlier, TAS and WA have no cooling-off period, so you’re locked in once you sign the contract.

The bottom line

Making the decision to back out of a house sale is never straightforward. In fact, it can be pretty taxing, both for you and your bank account.

The best piece of advice we can give is to know where you are in the house-buying process. Understand the cooling-off period. Do your due diligence. Know what signing a contract entails.

And if you are in a situation where you're getting cold feet, get in touch with your solicitor. They’re there to help you at every stage of the house-buying journey - even if you want the journey to end. In most cases, there’s a way to work through the situation while safeguarding your financial situation.

DiJones has supported Australia’s home buyers and sellers since 1992. Trust us when we say that we’ve seen every situation. Want some extra advice? Get in touch today and ask away. We’re always prepared to guide you through the intricacies of real estate and help you get the best possible outcomes. You can also visit our blog to read more of our insightful guides.