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Ask an expert: What if a buyer backs out of a contract before closing?

Buyer Backs Out of Home Purchase

A: When you enter into a contract with a buyer, you would think you have sealed the deal. But sometimes a buyer will pull out of a contract at the last minute. Most purchase contracts incorporate provisions regarding defaults, so the first step is to read your contract closely.

First, make sure your buyer has defaulted. Agreements often include contingency clauses, which allow the buyer to declare the contract null and void if certain criteria are not met. Some examples of contingencies include a satisfactory home inspection or adequate mortgage financing. Most clauses specify a time limit to meet the contingency. If the contingency is not resolved within the time limit, the buyer can back out of the purchase contract without penalty. For example, if the contract is contingent upon a 30-year fixed-rate mortgage, and the buyer has made a good faith attempt to secure the desired financing but has been denied, he or she can legally bow out of the purchase contract.

There are many contingency items that a buyer who gets cold feet can take advantage of to walk away from the purchase. Buyers who want to back out of a purchase agreement will often use the financing contingency, saying they were unable to obtain the loan needed to purchase.

If all of the contingencies have been resolved and the buyer decides to back out of the contract, it is indeed a default. In this case, check your contract for a liquidated damages clause, which will specify the compensation for which you are eligible. If you do not have a liquidated damages clause in your purchase contract, there are a couple of options you can pursue.

The simplest way to resolve a default is to keep the earnest money deposit — the percentage of the purchase price paid up front by the buyer to indicate the seriousness of his or her offer. The deposit is determined before the purchase contract is signed, so try to negotiate as large a deposit as possible.

If you feel the earnest money deposit is not sufficient compensation, you can take your complaint to court. Keep in mind though, that going to court can be expensive and time-consuming, and the outcome is unpredictable. Before you take any action against your defaulted buyer, consult a real estate lawyer for advice on your particular situation.

Try to avoid a default altogether by being proactive. Check in with your real estate agent to make sure he or she is monitoring all the issues surrounding your sale. If you and your agent discover that things are moving slowly or that the buyer may be getting cold feet, address it with the buyerÂ’s agent. If the buyer is going to back out, the best thing to do is to find out early and get the transaction cancelled so you can get your home back on the market. The worst thing to do is procrastinate. If you procrastinate, you will have taken your house off the market for weeks or months and likely missed another buyer. Plus, you will have made extra mortgage payments that make the pain of procrastinating even worse.

Bill Yeager
Regional Vice President, Real Estate

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