What terminating the contract means, and why the route decides the cost
Terminating the contract means ending a signed purchase agreement before closing, so that neither side has to perform: the buyer does not have to buy and the seller does not have to sell. The contract here is the written purchase agreement both parties signed, in most states a standard form produced by a state commission or a trade association rather than a document drafted for the occasion. Termination is not a negotiation and it is not an announcement. It is the exercise of a right, and a buyer who has just read an inspection report usually has more than one of them.
Two buyers can leave the same house in the same week and one keeps the deposit while the other forfeits it, because they terminated under different paragraphs. The useful question is never whether you can get out; almost anyone can stop performing. It is which right you terminate under, because the right is what decides the money.
None of this is legal advice, and every remedy below depends on the state the property sits in and on the contract you actually signed. The provisions quoted here come from Texas's promulgated form, from Texas and California statute, and from California standard-form practice, because those are the forms obtainable in full. Your own contract may do something different, and the paragraph numbers are the thing to go and read.
A paid option and a contingency are not the same instrument
The sharpest distinction in the subject is between a right you bought outright and a right that is conditional on something.
Texas buyers do not have an inspection contingency. They have a paid option. Under the Texas Real Estate Commission's One to Four Family Residential Contract, TREC No. 20-19, Paragraph 5B, the seller grants the buyer "the unrestricted right to terminate this contract by giving notice of termination to Seller" within an agreed number of days after the effective date. Unrestricted is doing real work in that sentence: the right is not conditioned on the inspection finding anything, or on an inspection happening at all. If notice is given in time, "the option fee will not be refunded" and "any earnest money will be refunded to Buyer." Notice is due by 5:00 p.m. local time where the property is located on the stated day, and a notice given after that is not a notice.
A contingency runs the other way. Under the California Association of REALTORS Residential Purchase Agreement, the buyer has an investigation period, 17 days after acceptance on the standard form, and the contingency stays alive past that date until the buyer affirmatively removes it. If the buyer neither removes it nor cancels, the seller cannot simply declare the deal dead; the seller must first deliver a Notice to Buyer to Perform, which gives the buyer at least two days after delivery to act. Where a party cancels "pursuant to rights duly exercised under the terms of this Agreement," the deposit is released to the party entitled to it, "less (i) fees and costs paid by Escrow Holder on behalf of that Party." A canceled California escrow does not usually hand back the deposit whole.
One route costs a fee up front and buys certainty; the other costs nothing extra and buys a conditional right with a notice procedure bolted to it. Each has its own page: the option period and the inspection contingency.
The lender-required repairs exit, and the 5 percent trigger
This is the exit most readers have never heard of, and it operates after the option period has normally expired. TREC No. 20-19 Paragraph 7E deals with repairs the lender demands as a condition of funding the loan, not repairs the buyer would like. It reads in full: "Unless otherwise agreed in writing, neither party is obligated to pay for lender required repairs, which includes treatment for wood destroying insects. If the parties do not agree to pay for the lender required repairs or treatments, this contract will terminate and the earnest money will be refunded to Buyer. If the cost of lender required repairs and treatments exceeds 5% of the Sales Price, Buyer may terminate this contract and the earnest money will be refunded to Buyer."
Two different mechanisms sit inside that one paragraph, and running them together is the common mistake.
- Termination by the contract's own terms. If neither party agrees to pay, the contract "will terminate." Nobody elects anything and nobody has to give notice of a decision. The earnest money is refunded.
- Termination at the buyer's election, above 5 percent. Where lender-required repairs and treatments cost more than 5 percent of the sales price, the buyer "may terminate," with the earnest money refunded, whether or not the seller has offered to pay for them.
Read the denominator carefully. The 5 percent is measured against the Sales Price, not the appraised value, not the loan amount, and not whatever repair budget the buyer had in mind. And this paragraph is not the inspection contingency in disguise: it is triggered by the appraiser or the underwriter, not by the report the buyer commissioned, which is why a Texas buyer whose option period has run out is not necessarily out of exits.
Nothing in the sources read for this site supports carrying the 5 percent figure to another state's form. Other states' standard forms are considerably thinner here, and several have no equivalent paragraph at all. The companion treatment is on seller-completed repairs.
A disclosure that never arrived is an exit too
Buyers forget this one, and it is often the widest door still open. Two rights sit on top of each other and they are not identical.
The contract right. TREC No. 20-19 Paragraph 7B(2) provides that where the Seller's Disclosure Notice was not received, the buyer "may terminate this contract at any time prior to the closing and the earnest money will be refunded to Buyer." Where the notice arrives late, the buyer "may terminate this contract for any reason within 7 days after Buyer receives the Seller's Disclosure Notice or prior to the closing, whichever first occurs." Paragraph 7I(2) builds the same structure around the Seller's Water Disclosure. Note "for any reason" in the second limb: once a late notice has triggered the window, the buyer does not have to object to anything in it.
The statutory right. Texas Property Code section 5.008 requires a seller of residential real property of not more than one dwelling unit to give the purchaser a written notice, delivered "on or before the effective date of an executory contract binding the purchaser to purchase the property." If a contract is signed without it, "the purchaser may terminate the contract for any reason within seven days after receiving the notice." The statute carries a substantial list of exemptions, among them foreclosure and trustee sales, transfers by a fiduciary, transfers between co-owners or family members, and new construction, so the first thing to establish is whether the sale is covered at all. The text quoted here comes from a public-law reproduction, because the Texas Legislature's own site serves a script shell rather than readable text, and it is corroborated by the promulgated form that implements it.
California runs a shorter clock. Civil Code section 1102.3 requires the seller's written Transfer Disclosure Statement as soon as practicable before transfer of title. Where delivery happens after the buyer has made an offer, the buyer may terminate by written notice within 3 days after personal delivery, or 5 days after delivery by mail or electronic transmission. Three days is not long to read a disclosure and decide.
What every right in this section has in common is that it expires at the closing table. Once the deed is recorded none of them does anything, which is the territory covered on finding a problem after closing.
Terminating without a right: default, and what the seller can actually do
If no provision gives you an exit and you stop performing anyway, you are not terminating. You are in default, and the contract decides what follows. TREC No. 20-19 Paragraph 15 is worth reading word for word, because it is routinely described wrongly: "If Buyer fails to comply with this contract, Buyer will be in default, and Seller may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the earnest money as liquidated damages, thereby releasing both parties from this contract."
Liquidated damages means a sum the parties agreed in advance would stand in for proven loss, so that nobody has to litigate what the loss actually was. The structure of Paragraph 15 is an election between remedies, not a ceiling on them, and specific performance, a court order compelling the sale to go through, is listed first for both parties. The widely repeated belief that the worst case for a buyer is losing the deposit is not what the form says. Whether a seller would actually pursue specific performance on a house that can simply be relisted is a separate and more practical question, and it depends on the market and on the seller. The form keeps the option open either way.
California caps the forfeit for one class of buyer. The liquidated damages paragraph of the C.A.R. Residential Purchase Agreement provides that where a buyer defaults the seller retains the deposit actually paid, and that "if the Property is a dwelling with no more than four units, one of which Buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price." The cap belongs to the owner-occupied one-to-four-unit case and nowhere else on the form. Two cautions. C.A.R. forms sit behind a member login and the copy read for this site is the 12/21 revision, so treat the 3 percent as the California standard-form cap and verify the paragraph number against a current form. And a cap on what the seller may retain as liquidated damages caps that remedy, not the matter.
The deposit mechanics themselves, including what happens when a buyer short-pays a combined check, are on earnest money.
Choosing the route, and what to look up in your own contract
Work the list in order. The cheapest exit is almost always a right you already paid for or a deadline the seller already missed, and the expensive one is the one you reach by not checking.
- Is a bought, unrestricted right still open? A Texas option period, or a North Carolina due diligence period. In North Carolina the state commission's own guidance is that terminating during the period is the buyer's sole decision, and that the buyer typically gets back the earnest money but not the due diligence fee unless otherwise negotiated. That guidance dates from 2014 and Form 2-T was revised effective May 27, 2026, so check the current form's paragraph references.
- Is a contingency still unremoved? In California the contingency survives its date until removed, and a seller who wants it gone has to serve notice first.
- Did every required disclosure arrive, and when? Check this even if you think you have no exit left. A notice that never came keeps a Texas termination right alive until closing.
- Has the lender required repairs that nobody will pay for? On the Texas form that terminates the contract by itself, and above 5 percent of the sales price the buyer can terminate alone.
- Only then, default — with Paragraph 15 or its local equivalent read in full first.
Four things to pull out of your own paperwork, none of which requires a lawyer to locate. First, the notice provision: how notice of termination must be delivered, to whom, and by what hour, because a right exercised by the wrong method is frequently not exercised at all. Second, the wording of your default paragraph, and in particular whether the earnest money is the seller's exclusive remedy or one the seller may elect. Third, whether your form has a liquidated damages clause and whether both parties signed or initialed it, since in several states an uninitialed clause does nothing. Fourth, your state's seller disclosure statute and its exemption list, which you can read in an afternoon.
Where the answer genuinely is that it depends on your state, the question to put to a real estate attorney licensed there is narrow enough to be answered quickly: under my contract, is the deposit the seller's only remedy or an elected one, and has any statutory termination right been triggered that I have not used? The primary sources behind this page are the TREC One to Four Family Residential Contract, Texas Property Code section 5.008 and California Civil Code section 1102.3.