When Homebuyers Walk Away From Closing
Walking away from a closing happens more often in buyer's markets than in seller's markets. Some buyers become frightened when prices are soft when they should really be jumping with joy. Many are afraid of further declines in the market and don't feel comfortable because all their friends aren't buying, too.
The fear usually begins to creep in right after the purchase offer is accepted and it builds from there. It's typically a day or two before closing when full-blown panic sets in and buyers might be inclined to pull the plug. Can they do that? Can a buyer walk away?
Sure, but it can hit a buyer where it hurts—right in the pocket.
Sellers Who Walk Away From Closing
It's rare that a seller will walk away from closing. If sellers are going to feel seller's remorse, it typically happens when an offer is presented and the reality of actually selling sets in.
When Homebuyers Walk Away From Closing
Well-written purchase offers usually include contract contingencies that must be removed within a certain period of time. This contingency stage is the time for a homebuyer to walk away from closing or to cancel a contract. But buyers sometimes don't walk away until the last minute.
Sometimes the initial dread that confronts first-time homebuyers doesn't dissipate with time. Buyers who feel remorseful toward the end probably shouldn't buy a home because the pressures of homeownership might be too much for them to handle. These types of buyers might be better off renting vs. buying a home.
Why Homebuyers Walk Away From Closing
Any number of events can make a homebuyer turn away.
There might be last-minute problems with financing. Even though a lender might issue a loan preapproval letter, this doesn't necessarily mean that it will give the buyer a loan. Buyers could face underwriting stipulations that they can't perform after the loan contingencies are removed. An experienced loan officer can fix many conditions for loan approval in advance, but some loan officers are inept.
The grass is always greener on the other side. A buyer might keep looking at homes and going to open houses after she's committed to buying. Another home can turn into her dream home in the blink of an eye. This means goodbye to the first "dream home" and hello to the second.
Unexpected job transfers, sudden pay demotions, an unplanned divorce, or any number of other life-changing circumstances can cause buyers to do an about-face on the brink of closing. Medical emergencies can cause buyers to cancel transactions.
Sometimes it has nothing to do with the buyer's whims or qualifications at all. Weather conditions are unpredictable. The home itself could be destroyed in a tornado, hurricane, earthquake, or flood, or at least it might suffer enough damage to affect the sale. Any number of natural disasters can cause havoc and render a home inhabitable.
Most buyers would walk away under these circumstances, and rightly so. But they might also walk if their request for repairs isn't completed or if something else went wrong with the home which they don't discover until a final walk-through inspection.
The Repercussions of Walking Away From Closing
A buyer's earnest money deposit is at risk after contingencies have been released from the contract. Some contracts call for liquidated damages in the event of default at this time. Without liquidated damages, a seller might be free to sue for actual damages, which could exceed the deposit.
All earnest money deposits are negotiable. It is not unusual for a seller to accept $1,000 as a deposit on a $500,000 home, but the higher the deposit, the more money the buyer has at risk under liquidated damages.
Buyers who want to walk away will often forfeit their deposit. If it's only $1,000, that amount might not be substantial enough to force the buyer to follow through and close. The money the seller receives for the buyer's default could be limited to the actual deposit on hand if both parties have previously agreed to liquidated damages.
The battle for the earnest money deposit often escalates, and a seller might decide to go to court and ask for even more money from the buyer.
Please consult a real estate lawyer if you find yourself in a position where you want to walk away from a real estate purchase at the 11th hour. The information contained here is not intended as legal advice and should not be relied upon as legal advice.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.