How to Cancel a House Purchase Due to Non‐Disclosed Problems

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1Documenting the Problem

2Canceling the Purchase

3Suing After the Purchase

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You can cancel a real estate contract if you discover problems with the home which were not disclosed to you. Most states require sellers to make certain disclosures to buyers, and if the seller fails to make a required disclosure then you can cancel. In that situation, you should document the problem and have your agent or lawyer send the seller a letter canceling the contract. If the sale has already gone through, then you can sue for money.

Steps

Part 1

Part 1 of 3:

Documenting the Problem

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   Identify problems with the property. Buildings often have lots of problems, in particular older buildings. You should identify the problem that was not disclosed. Common problems include:

   • leaky windows
   • work done without adequate permits
   • termite problems
   • history of property line disputes
   • defects with major appliances
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   Find your disclosure statements. In many states, such as California, a seller must give you a statutory real estate disclosure form. This form contains a checklist of potential problems with the property. You should take out your checklist and see if the seller identified the problem on the disclosure form.

   • The seller also has a duty to disclose other problems which might not be on the checklist. In fact, sellers have a duty to avoid fraud or misrepresentations. This means they must disclose any fact if they know it would impact the desirability or value of the property.
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   Have an inspection done. You should always have an inspection done so that you can identify any problems before going ahead with the purchase. Oftentimes, the seller will hire the inspector and provide you with a copy of the report.

   • You can hire your own inspector. Your real estate agent should know someone who is reputable.
   • You do not have to have an inspection performed in order to cancel the contract. It is enough if you discover the problem and the seller didn’t disclose it. However, an inspection helps protect you by bringing to light all potential problems.
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   Talk to your agent. Your agent can help you analyze the problem and what your next steps should be. You should also discuss whether you really want to cancel the contract. As an alternative, you could bring the problem to the seller’s attention and ask them to fix it.
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Part 2

Part 2 of 3:

Canceling the Purchase

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   Check if you have a sales contract. You might not have yet signed a purchase agreement. In this situation, you can generally cancel the purchase at will. Have your lawyer or real estate agent send a letter to the seller’s representative. The letter should state that you are withdrawing your offer.

   • Because you haven’t signed a contract, you shouldn’t have paid any earnest money to the seller. Therefore, you don’t need it refunded.
   • However, if you did pay earnest money for some reason, then you need to ask the seller to return it to you.
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   Analyze your situation with a lawyer. You might not discover a problem until you have already signed a contract. Each state’s laws are different, and you might want to meet with a real estate attorney to talk about getting out of the contract. When you notify the seller to cancel, they could respond in one of several ways:

   • The seller might accept the cancellation and refund your earnest money. This would be the ideal result.
   • The seller might accept the cancellation but want to hold onto some of the earnest money.
   • The seller might not accept the cancellation and insist that you go ahead with the contract by sending you a Notice to Perform. In that situation, you need to discuss with the lawyer what your next steps could be.
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   Notify the seller you are cancelling. You should tell the seller you are cancelling the sales contract and identify the problem that wasn’t disclosed. Your lawyer or real estate agent can then draft a “purchase contract cancellation agreement” and send it to the seller. The seller must also sign this letter, which should contain the following information:

   • the address of the property
   • the date of the contracts
   • the names of the parties to the contract
   • request to refund the earnest money
   • statement that all parties agree to cancel the purchase agreement and all other agreements between them
4. 
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   File a lawsuit for rescission, if necessary. The seller might not want to let you out of buying the house. In this situation, you can bring a lawsuit for “rescission,” which is cancellation of the contract.

   • Your lawyer will have to draft the complaint and make a request for rescission. Your lawyer will then send a copy of the complaint and other documents on the seller, who has a chance to respond to your lawsuit.
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   Attend court. If the seller wants to fight the cancellation, you should read their response and gather evidence to present to the judge. You generally will need a copy of the purchase agreement, any notification you sent to the seller, and evidence of the problem the seller failed to disclose.

   • If you win, the judge will sign an order of rescission, which cancels the contract. You can get a certified judgment from the court clerk.
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Part 3

Part 3 of 3:

Suing After the Purchase

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   Identify the misrepresentation or non-disclosure. If you go through with the purchase and discover a defect after the sale, then you can sue for your injury. Often, you can sue for misrepresentation or non-disclosure. You should identify the specific misrepresentation or nondisclosure made by the seller or their agent.

   • Nondisclosure is a failure to reveal important information about the property. For example, not telling the buyer that a renovation was done without a permit is a nondisclosure.
   • A misrepresentation is a misstatement about a meaningful feature of the property. For example, stating, “A new roof was put on last year” is a misrepresentation if the roof has not been replaced in 25 years.
     • Misrepresentations can be intentional, meaning the person deliberately lied in order to get you to sign the contract.
     • Misrepresentations can also result from carelessness when the seller didn’t properly investigate the property. These are negligent misrepresentations.
     • Misrepresentations can also be innocent, meaning the statement was wrong even though the person making it had reasonable grounds for believing it was true. In some states, you may be able to sue for innocent misrepresentation.
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   Document the problem. You will need to show the judge that the problem exists in order to bring a lawsuit. You should get evidence, such as photographs or a report from an inspector. In order to sue, you also need to show the following:

   • The problem existed before you bought the home. If the problem developed later, then the seller can’t be held responsible. Generally, you can show when the problem developed based on how extensive the damage is. Severe water damage from a leaky roof probably didn’t develop overnight.
   • You weren’t aware of the problem. Generally, you can’t sue if you were aware of the problem because it was so obvious, such as a giant crack in the ceiling.
   • You relied on the misrepresentation or non-disclosure.
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   Calculate your damages. You can get monetary compensation as part of your lawsuit. The money is meant to compensate you for the injury you have suffered as a result of the nondisclosure or misrepresentation. In order to calculate your damages, you should look for the following:

   • How much you spent fixing the property. If the building had a leaky roof, then you should have receipts for money spent fixing the roof.
   • The true value of the property. You can get reimbursed for how much you overpaid for the property given its real condition. For example, you might have paid $200,000 for a house. However, given its defects, it is appraised at $130,000. This means you can get $70,000 as compensation.
   • Attorney’s fees. Depending on the contract and your state law, you might be able to get reimbursed for the amount spend on attorneys.
   • Punitive damages. You also might get punitive damages. These are meant to punish intentional wrongdoing.
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   Decide who to sue. You can sue the seller for any misrepresentations or lies in the sale of the house. However, you may also be able to sue the seller’s agent/broker as well for any misrepresentation or non-disclosure, especially if they observed the problem or were told of it.

   • You might also be able to sue an inspector, if they didn’t discover the problem.
   • You should talk with your attorney about who to sue. Not every state allows you to sue a real estate agent.
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   Avoid delay. You get only a limited amount of time to sue someone for misrepresentation or non-disclosure. This amount of time is called the “statute of limitations.” You can check with your attorney to make sure that you are within the statutory period.

   • Each state’s statute of limitations is different. They also differ depending on the cause of action, such as non-disclosure or misrepresentation. Generally, however, they are two to ten years.
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   Check if you agreed to resolve the dispute outside of court. You should read your contract and see if you agreed to mediate any dispute before going to court. In mediation, you and the seller meet with a neutral third party, the mediator, who helps you come to an agreement. The purpose of mediation is to avoid costly lawsuits.

   • You might also have agreed to arbitrate the dispute instead. Arbitration is like a trial. However, arbitration is held before a panel of arbitrators, not judges. Arbitrators are usually lawyers or former judges who you pay to decide the dispute. Unlike trials in court, arbitration is private and sometimes faster.
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   Send a demand letter. You should try to get the responsible party to reimburse you for the damage. You can send a demand letter, stating the extent of the damage and that you relied on the misrepresentation or non-disclosure when buying the property. Give the seller a deadline to reimburse you.

   • Mail the demand letter certified mail, return receipt requested and keep a copy for your records.
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   File a complaint in court. You start a lawsuit for misrepresentation by filing a complaint in an appropriate court and sending a copy to the defendant. Your lawyer can draft this document. It will identify the following information for the judge:

   • the parties to the dispute (you and who you are suing as “defendants”)
   • why the court has power over the dispute
   • the facts surrounding the dispute
   • your legal causes of action (such as misrepresentation or failure to disclose)
   • what you want the judge to give you (your “prayer for relief”)
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   Read the defendant’s response. The defendant can respond to the complaint by filing an “answer” or a “motion to dismiss.” They will send this document to your lawyer. You and your lawyer should analyze the response.

   • In an answer, the defendant will respond to each allegation you have made. They might also raise certain defenses, such as you waited too long to sue.
   • In a motion to dismiss, the defendant will claim your complaint is deficient in some way. For example, you might have sued in the wrong court, or you didn’t allege enough facts to make out a valid cause of action.
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    Prepare for trial. Lawsuits are long and complicated. Your lawyer should advise you about what will happen. There will be opportunities to settle with the defendants along the way. Stay in contact with your lawyer and attend as many court hearings as possible.

    • For more information about the nuts and bolts of lawsuits, see Win a Civil Lawsuit.
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