The fact that a home or piece of property has found a willing purchaser and is under contract doesn't necessarily mean that the sale will successfully close. Many situations can cause a real estate deal to fall through, ranging from the buyer's job loss to "buyer's remorse."
What happens when the sale of a house doesn't work out? In some cases, you as a home seller can take legal action if a buyer refuses to complete a sale. Limitations as to what you can do are typically written into the sales agreement itself, and probably narrow your options, so read the contract carefully and follow the steps below, including:
- getting clear on your immediate goals
- establishing whether the cancellation amounts to a breach of contract, in legal terms
- understanding that you will need to choose among legal remedies, then
- opting to either keep the earnest money, sue for damages, or sue for specific performance (for the sale to go through).
Consider Your Goals If a Home Buyer Backs Out
It's wise to stay focused on your top priority as a seller, namely to sell your property rather than put the squeeze on the person you thought was going to buy it. Even if it's the buyer's fault that the sale didn't close, getting your property back on the market and finding another buyer could be the best thing to do. It might also save you time and get your house sold faster in the long run.
Still, it's helpful to know about your possible remedies if your sale falls through, so that you can make an educated decision about what to do next. You'll want to talk to your real estate agent and possibly a real estate lawyer before proceeding.
Make Sure the Home Buyer's Action Constitutes an Actual Breach
Home purchase contracts are typically full of potential escape hatches for the buyer. In legal jargon, these are known as "contingencies." While they're usually used legitimately, they can also be easily used by buyers who've simply gotten cold feet. (Surveys of buyers commonly show that anywhere from 20% to 60% experience regret or remorse.)
Financing contingencies are often-seen reasons for canceling a home purchase contract. If the contract is conditioned on the buyer successfully obtaining a mortgage on acceptable terms, and the buyer makes a good faith effort to apply for one but is then turned down, the sale won't close and the buyer will not be at fault.
Inspection contingencies also frequently result in deals not closing. Your buyer, if careful, is likely to have insisted that the contract include a clause conditioning the sale on the buyer not only hiring a home inspector, but being satisfied with the results of that inspection. If the inspection turned up defects (as they all do), and the buyer is not willing to deal with those defects or the two of you can't successfully negotiate over repairs, the deal is over and the buyer is not in breach of the contract.
Other contract contingencies can bring about similar results.
Only One Legal Remedy Allowed at a Time
In most situations, an aggrieved home seller can pursue only one legal action at a time. If one remedy fails, though, you might be able to file another lawsuit for a different reason. Remember, your sales contract might limit your options.
For example, the contract might state that if the buyer fails to close without good reason, you are entitled to "liquidated damages," which is a set amount of money (usually, the earnest money payment), and that you are not allowed to pursue any other legal remedies.
It's important to know that if you choose to file a lawsuit, the buyer may file a "lis pendens" in the public records. This notice shows that your property is involved in a lawsuit, and you won't be able to sell it during this time. Potential buyers won't likely make offers, and most won't even look at your property, knowing that it could be tied up in the courts for some time.
Home Seller Keeps Earnest Money Payment
When the seller is ready, willing, and able to sell the property and the buyer refuses to close on the sale for a reason not excused by a contingency, the seller has the right to terminate the contract and keep the earnest money payment (called a down payment in New York, not to be confused with the 20% down payment that most buyers make at closing).
This is usually legally valid even if the amount of the earnest money deposit is more than the amount of any damages to the seller caused by the breach. It is also valid if the home seller has resold the property to another person for more money than the original contract price.
When the home seller doesn't abide by the contract, or if both buyer and seller are in default, the buyer usually gets the earnest money back.
Home Seller Sues for Damages
A seller may bring a lawsuit against the buyer and ask for money damages when a buyer has not done what was agreed to in the contract. The amount of the damages the court may award will be based on the difference between the contract price and the market value of the property at the time of the breach, less any down payment or other payment already made, plus interest from the date of default. In other words, the court will try to put you in the same financial position as you would have been without the breach.
Home Seller Sues for Specific Performance
A lawsuit for specific performance involves the person claiming a breach of contract asking the judge to order that the transaction be completed according to the terms of the contract, rather than ordering a payment of money damages.
A seller does not have a contractual right to specific performance; whether or not to grant it is up to a court. Given that making someone move into a house they no longer want seems a bit extreme, the remedy is rarely granted.
A court might, however, consider granting specific performance if the contract is clear and definite and an award of money will not return the individuals to the positions they held before signing the sales contract. If the agreement is definite in all of its essential elements, specific performance can be granted. Essential elements of the contract typically include the purchase price, deposit amount, legal description of the property, financing terms, closing date, and effective time period of the contract.
Home Seller's Lien on the Property
In most states, the seller has an implied equitable lien on real estate that has been transferred to the buyer for any part of the contract price remaining unpaid. The lien is a right to have the unpaid balance paid out of a sale of the property.