Walking Away From Closing
Home Buyers Who Walk Away from Closing Escrow
Walking away from closing happens more often in buyer's markets than in seller's markets. That's because in buyer's markets, when prices are soft, some buyers become frightened when they should be jumping for joy. Many are afraid of further declines in the market and don't feel comfortable because all their friends aren't buying.
The fear begins to creep in right after the purchase offer is accepted and builds.
By the time full-blown panic has set in, it's typically a day or two before closing. 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 walks away from closing. If sellers are going to feel seller's remorse, that typically happens upon offer presentation, when the reality of actually selling sets in.
Although, I know a seller who bought another home and shortly thereafter changed her mind. She had moved out of her existing home and into her new home before her first home closed escrow. Within a few days of settling into her new place, she decided to cancel the sale of her first home and move back home. Of course, by then she owned two homes. But that happens once in a blue moon.
Why Home Buyers Walk Away From Closing
Well-written purchase offers generally contain contract contingencies that must be removed within a certain period of time.
The time to walk away from closing or cancel a contract for most home buyers is during the contingency stage. Buyers who walk away at the last minute often do so for the following reasons:
- Cold feet.
Sometimes, the initial dread that confronts first-time home buyers doesn't dissipate with time. Buyers who feel remorseful toward the end probably should not buy a home because the pressures of home ownership can be too great for them to handle. These types of buyers might be better off renting vs. buying a home.
- Rejected mortgage financing.
Even though lenders may issue a loan preapproval letter, it doesn't mean the lender will actually give the buyers a loan. After the loan contingencies are removed, buyers could face underwriting stipulations that they cannot perform. An experienced loan officer can foresee many conditions for loan approval and fix them in advance, but alas, some loan officers are inept.
- Found another home.
The grass is always greener on the other side. Once a buyer has committed to buying, he or she might keep looking at homes, going to open houses and, before you know it, another home turns into that dream home. Which means goodbye to the first dream home and hello to the second. It's not a good idea to let impulses control your life.
- Change in lifestyle.
Unexpected job transfers, a sudden pay demotion, an unplanned divorce, any of these circumstances can cause buyers to change their minds about following through with a purchase. Sometimes medical emergencies can cause buyers to cancel transactions. Unfortunately, one's life doesn't always work out the way it is planned after an offer to purchase is accepted. It's good to have a Plan B.
- Natural Disasters.
Weather conditions are unpredictable. The home itself could be destroyed in a tornado, hurricane, earthquake or flood; any number of natural disasters can cause havoc, rendering a home inhabitable. Even a hard rain storm could cause trees to uproot themselves and crash into a home.
Most buyers under those circumstances would walk away. But they will also walk if their request for repairs was not completed or something else went wrong with the home, which they might discover during a final walk-through inspection.
Repercussions After Walking Away From Closing
Unfortunately, once buyers have released contingencies from the contract, their earnest money deposit is at risk. Some contracts call for liquidated damages in the event of default. Without liquidated damages, a seller may 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; however, the higher the deposit, the more money the buyer has at risk under liquidated damages.
Buyers who don't care about closing and want to walk away will often forfeit their deposit. If it's only a $1,000, in the overall scheme of things, that amount may not be substantial enough to a buyer to force the buyer to follow through and close.
If both parties have previously agreed to liquidated damages, the money the seller receives for the buyer's default could be limited to the actual deposit on hand.
The battle for the earnest money deposit often escalates. On top of this, a seller might decide to go into court and ask for even more money from the buyer.
For more advice, please consult a real estate lawyer.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.