Categories: Ask Brian

Ask Brian: What Happens When a Home Buyer Backs Out of a Signed Purchase Agreement?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Home agents are sending pens to customers signing a contract to buy a new home.

Question from Shelly in LA: Hi Brian, We are in bad financial shape and both of us have failing health. The time has come for us to sell our house and move into an assisted living facility. We decided to sell our house as “for sale by owner” to save the agent’s commission. We thought it would be easy because houses have been selling so fast for the past couple of years. After four months, we only had seven people call about the house, and three seemed to look at it seriously. The last one that looked at it made an offer that we accepted. Both the buyer and we signed a generic purchase agreement. That was six weeks ago and now the buyer says he isn’t going to buy the house because he doesn’t have enough money and he doesn’t want to take out a mortgage at an interest rate that is higher than it was when he signed the purchase agreement. What can we do to make him buy the house?

Answer: Hello Shelly. I don’t know what is in your generic purchase agreement. Because it was not written by a professional real estate agent, the contract could have almost anything it. My first thought is that you might be learning why earnest money is an important part of a purchase offer and purchase agreement. But there could be something else involved such as a contingency clause. Because your buyer is saying it is about not taking out a mortgage at today’s interest rate, I’m thinking the earnest money is what you will primarily get from a failed sale of your house. You did get an earnest money deposit, didn’t you?

I’m assuming that once both of you signed the purchase agreement you stopped trying to find another buyer. You probably took down the “For Sale By Owner” sign and stopped running any newspaper or online advertising. It’s normal to stop trying to sell a house while waiting for an appraisal, a home inspection, final mortgage approval, and for the sale to close. The buyer makes an earnest money deposit (usually to an escrow account) to show that he is serious about taking the action needed to complete the purchase. When the sale closes, the earnest money is usually applied towards the purchase price.

It is also normal for the earnest money to have contingencies under which it is refunded. There can be many different contingencies. The seller and buyer sign a contract that defines the conditions of refunding earnest money. Typically, the earnest money is returned to the buyer if the house doesn’t appraise for more than the amount of the mortgage, the inspection reveals a severe defect to the buyer or the mortgage company, or the buyer does not qualify for a mortgage. The last one (buyer does not qualify for a mortgage) is a big reason why most sellers will only accept offers from pre-approved buyers. Another common contingency is when the buyer is unable to sell their current home before closing on the new one.

Shelly, if the buyer simply decides not to follow through with the purchase (as you say), then you are entitled to keep his earnest money. You can then go back to trying to sell your house and you are a little richer because the first buyer did not do what he signed up to do. This is why sellers like to see a large earnest money deposit – to show how serious the buyer is about completing the deal.

I ended up keeping the earnest money on the very first house that I sold. A buyer couldn’t qualify for a mortgage when he made the purchase offer but thought he would qualify in three months. He asked me to rent the house to him for three months until he could qualify. I agreed to rent to him, but I didn’t allow a financing contingency as a condition under which the earnest money would be refunded. He still didn’t qualify for the mortgage three months later. I had taken the house off the market for those three months. The house also went through the wear and tear of having a family move in and move out. I kept the earnest money and put the house back on the market. I sold the house for about the same amount two months later.

Do you think Shelly has any other recourse? Please leave your comments.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Brian Kline

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