Walk Out of a Home Deal Unscathed
Home prices continue to drift down in most major markets, but the number of home sales seems to be picking up at least. Whether you are a potential buyer or seller, you may be tearing your hair out. What if you make a deal but changing circumstances give you second thoughts? What happens if you back out?
If your contract contains a contingency allowing you to back out of the deal, you may get out unscathed. If not, you could face big expenses or a lawsuit. Before signing a contract in today’s uncertain market, buyer and seller should consider the ramifications of pulling out.
Whichever side of the deal you’re on, you may want to give yourself an escape hatch while making sure the other party doesn’t. If your escape hatch is too easy to use though, the other party may not sign the contract in the first place. It’s a fine line to walk.
Contracts are usually contingent on the home passing a final inspection by a professional. Typically, each party is locked into the deal unless the inspection reveals a need for repairs exceeding an agreed-upon cost, such as $5,000. Contracts also require that the seller have a clear title.
It’s also common for the buyer to be able to cancel the purchase if he or she does not get a mortgage of a given amount or below a specified interest rate.
In many cases, a buyer will make a deal contingent on selling his or her current residence. That may be necessary for the buyer to afford the new home, but when sales are sluggish, as they are now, the seller may feel such a requirement introduces too much uncertainty.
In negotiating the contract, buyer and seller can propose any contingencies they like, but the other party doesn’t have to agree. The seller will probably balk if the buyer specifies an unrealistically low mortgage rate, as that would increase the chance the deal wouldn’t go through. A buyer probably wouldn’t go for a deal that would let the seller back out if any repairs were required, or if the seller wanted to set the mortgage-rate limit so high it would require a payment that was too big.
In most deals, the buyer puts down “earnest money” when the contract is signed. That may be just a few hundred dollars, with a provision that a much larger sum be put into escrow soon afterwards to cover the down payment. If the buyer backs out of the deal, this money will probably be forfeit unless a contingency has been triggered.
If the seller backs out, the buyer can sue to force the deal to go through, perhaps winning damages as well. In such cases the real estate agent may also win a suit demanding that the seller pay the commission.
Because today’s market is so fluid, conditions could change in the 60 to 120 days between the contract signing and the closing. The seller may feel that the agreed-upon price was too low, or the buyer might feel it is too high. The buyer might find a more suitable home, while the seller might get a better offer from another buyer.
Regardless of what the contract says, it may be possible for either a buyer or seller to negotiate with the other party to cancel the deal, since the other party may not want the hassle, cost and delay of a court fight.
A buyer or seller who wants out should think about what it would take to satisfy the other party. A seller who wants to cancel, for example, would be wise to offer the buyer enough money to cover all expenses to date, such as the appraisal and inspection, as well as some compensation for the buyer’s inconvenience.
In today’s buyer’s market, a buyer may have a good chance of finding another good home at a good price, and can therefore afford to let a seller off the hook. When buyers are scarce, the seller may be inclined to play hardball when a buyer wants out.
There’s a good chance the party that does not want out will dig in and make the other’s cold feet very expensive indeed. A lost lawsuit would probably damage the loser’s credit score, too, making it harder or more expensive to borrow in the future.
So there’s one overriding rule in a real estate transaction, and really any transaction: Don’t sign a contract unless you are really sure you want to do the deal.
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