There is a lot to consider before making the decision to cancel a home purchase. What was agreed to in the contract? Will money be lost? How could this hurt you or the sellers?
Q: I was under contract to buy a home. It took forever for the mortgage company to get its act together, but we finally got to a closing date. During the final walk-though I noticed that most of the items the seller was supposed to repair were not fixed.
The listing broker said the repairs had been made, but did not have any paperwork proving it, so I decided to cancel the contract. Now, the seller is trying to get money from me for waiting until the last minute to cancel the deal. Can she really do that? I’ve now had to hire a lawyer. This whole mess is costing me money I don’t have! –Hazel
Well, first things first: Some of the definitive answers to your questions will vary slightly depending on the law and standard real estate practices that govern in your state and the specific terms of your contract.
Secondly, I’m glad to hear that you have hired an attorney, because I would say you need to. I’m not big on Monday morning quarterbacking (whew, got my sports analogy of the year out of the way early!), but you actually should have consulted with a local lawyer before you canceled the contract, to get a professional evaluation of whether canceling the transaction would create any liability before you made that move.
1. How major were the repairs the seller agreed to make? The issue you bring up is one of material vs. nonmaterial breach. A material breach of the contract is something so serious that it excuses the other side from his or her corresponding contract obligations.
For example, if you failed to come up with the sale price, the seller would be excused from having to sign the deed over to you, and vice versa. However, if the seller of a $400,000 home failed to complete $500 worth of repairs, chances are good that a court would not find that breach to be “material” or serious enough to excuse you from closing the deal.
If the seller’s breach was nonmaterial, as the majority of the repairs requested by buyers in your situation are, it is completely possible that you’re on the hook for causing damages to the seller, who pulled her home off the market and potentially forewent other buyers in a very tough market, based on your word that you planned to close the deal.
Of course, if the seller agreed, in writing, to complete the repairs, then she was responsible to get them done. But unless the repairs were material or you expressly created a new contingency — a right to back out — based on the completion of those repairs, you do not have the right to cancel the transaction if the repairs are not done.
If the seller does not actually complete the repairs, your remedy is to demand that they are completed, or to take the seller to court after the fact to collect your damages.
(Of course, many buyers find that simply holding the closing off for a few days and demanding that the seller complete the repairs or sending a stern letter citing their legal rights gets the job done quickly and without any significant legal costs or drama.)
2. Did you put down an earnest money deposit? Typically, a buyer puts what’s called an “earnest money deposit” into the escrow account at the very start of the transaction, to assure the seller that he or she is in earnest about doing the transaction.
Most real estate sale contracts give buyers the ability to back out of the deal by exercising a contingency or making an objection within a short time frame after the contract is signed or the seller’s bank green-lights the terms of the short sale.
If you allow that time period to elapse without making an objection, or you remove your contingency, you likely waive your right to back out of the deal without forfeiting your deposit or exposing yourself to liability if you do later kill the deal.
Most buyers remove contingencies in exchange for a seller’s agreement to complete repairs, and many mortgage lenders or short-sale banks require to see the written removal of contingencies in order to proceed with the transaction.
That means that if you paid an earnest money deposit and removed your contingencies, that deposit could very well be in danger. If it is being held by the escrow company, escrow will likely require the signatures of both you and the seller, or a court order, to release the deposit money to the appropriate party.
3. Did you agree to pay liquidated damages? Even if you didn’t put any deposit money in escrow, if you initialed one of the liquidated damages clauses that are now extremely common in real estate contracts, it is entirely possible that you might be liable for whatever liquidated damages were included in the contract.
Three percent of the purchase price is a standard amount of liquidated damages; accordingly, if it is found that you breached the contract by failing to close the deal so late in the timeline and you did in fact agree to liquidated damages, you might owe whatever amount was stipulated in the contract.
While that sounds bad, it could actually be even worse if you did not agree to liquidated damages, if the value of the home has declined in the time you were in contract.
Then, an arbitrator or judge could decide that the seller’s damages from your breach of the contract should be quantified by the amount of how much value the home lost while she had it off the market, waiting for you to close the deal.
On the other hand, if the home is in one of the rare areas of the country that has actually appreciated in recent months, the seller’s actual damages might be much smaller, if she is found to have had any damages at all.
That said, the news it not all bad. If you’re still interested in the home, consult with your attorney and your broker about whether it makes sense to offer to close the transaction if the seller can provide you with visual and written documentation that the repairs have been completed.
If you’re no longer interested in the home, that’s OK, too, but know that unless the repairs were material, you might be on the hook for the seller’s damages.
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