Q: What is the best route to go if the buyers lose their jobs prior to closing and cannot qualify for the mortgage? The people who were planning to buy our home put down a substantial amount of earnest money, and also began maintaining our yard. They spent $2,500 to clear trees downed by Hurricane Irene. Then, they backed out of the deal three days before closing!
We don’t feel obligated to return any of that money. What rights do we have? –Mary, North Carolina
A: I’m so sorry you’re having to go through this. If it helps at all to know that you’re not alone, a survey just released by the National Association of Realtors revealed that 33 percent of the trade group’s members reported transactions in which the contracts had been canceled, most often because the seller’s bank doesn’t approve the short sale, the home doesn’t appraise at the purchase price, or the buyer’s financing falls through.
What the numbers don’t show is the emotional and lifestyle chaos that is caused when a buyer backs out just a matter of hours before escrow closes, as you’ve experienced.
Chances are good that your belongings were packed or even already moved, and your next home already bought or rented. That only makes the idea of now having to go through the whole ordeal of facing such a competitive listing market and reshowing and reselling your home even worse than it would have been if your buyer had backed out much earlier in the timeline.
Fortunately, you do have some rights and resources available to you. Here is a short list of items you should be aware of as you put your action plan in place for responding to the situation you find yourself in:
1. Keep the earnest money deposit. The entire point of the buyer placing an earnest money deposit is to assure the seller that the buyer is "in earnest" about doing the transaction, justifying the seller’s work and investment in pulling the place off the market, and forgoing other buyers.
You will need to consult with your real estate broker and local attorney to be certain, but chances are very good that you will be able to retain the buyers’ deposit funds to offset your damages. Many states’ real estate contracts expressly provide for this, although most states’ liquidated damages clauses also cap the amount that a buyer is required to forfeit in such a case at 3 percent of the purchase price.
If the buyers’ deposit was greater than the amount specified in a liquidated damages clause, if one did in fact apply to your contract, you might be limited to keeping that 3 percent.
And to be clear, you are not required to retain the buyers’ deposit money, in any event. I have known sellers who were able to score a better price, quickly, and found it in their hearts to help the newly unemployed former buyer out by refunding his deposit even though they were not legally responsible to do so.
2. You don’t owe them anything for the trees. I can’t think of a situation — barring you having agreed in writing to refund the buyers for the money they spent on your yard — in which you would be liable to pay the buyers back for the tree clearing they paid for. In fact, your situation illustrates one of several reasons buyer’s agents so often caution buyers not to begin maintaining or improving or even moving into homes before closing.
3. Get your home back on the market, as soon as possible. Once your agent notifies the buyers and the escrow company that you plan to retain the earnest money deposit, the buyers will either authorize the escrow holder to release it or refuse to do so, and you’ll have to either initiate a legal proceeding or other form of alternative dispute resolution (depending on the terms of your contract) to go about getting that cash in your hands.
But don’t let that distract you from what is really important, which is getting your home on the market, with no further ado.