When the buyer cannot close escrow on time, it can cause all sorts of problems. The main problem is that purchase contracts contain an acceptance date coupled with a closing date. If the closing date is missed, at a minimum, the contract is in jeopardy; the worst-case scenario is the contract has expired. The typical action is to extend the closing date, but the sellers might not agree.
- When a homebuyer cannot close escrow in time, the seller must decide whether to extend the closing date.
- Sellers may not want to extend the closing date if they feel they didn't sell for a high enough price or they simply don't like the buyers.
- In other cases, the seller generally asks the buyer to sign an extension of time addendum and learns why they need an extension.
- A strategy that works well is to offer to release the buyer's earnest money deposit to the seller before closing—presuming they are certain they can close escrow.
Reasons Not to Extend the Closing
After some time has passed, sellers may feel as though their property value has increased, inspiring them not to extend the closing. Perhaps friends or relatives have consistently stated that the seller did not sell for an amount they felt was high enough. Either way, presumed value plays a big role in the decision. In fast-moving markets, prices tend to move up.
Further, perhaps the buyers asked for a request for repairs during the middle of the escrow that left a bad taste in the seller's mouth. Not all buyers and sellers get along during the escrow period, and sometimes negotiations head south, and negative feelings develop. It's possible that the seller might be looking for an excuse to get rid of the buyers.
A seller is not always legally entitled to cancel; a court of law might see things differently. A lawyer might present a case to prove the buyer acted in good faith, and the intent was to close.
In such a situation, the court could decide a seller might not have a legal right to terminate a contract simply because the time period has expired. There is little black and white in court. Still, it won't necessarily cause a seller to sign an extension of time agreement if the seller disagrees. A seller might also decide to no longer sell the property.
Reasons for an Extension to Close
When a buyer cannot close on time, the seller generally asks them to sign an extension of time addendum, and figures out why they need additional time. After the inception of TILA-RESPA Integrated Disclosure (TRID), or "Know Before You Owe" rule, closing delays escalated slightly. TRID aimed to integrate federal mortgage forms that were required under the Truth-in-Lending Act and Real Estate Settlement and Procedures Act. In defense of TRID, many times, the delays are due to poor communication between the lender and closing agent or title company.
Further, a rejection in underwriting makes matters much worse. Borrowers face extreme scrutiny to obtain a loan. Not to mention, sometimes things from their past that they thought were buried—like short sales, foreclosures, and personal judgments recorded in other states—have a way of popping back up. The reason for the delay much of the time can be traced directly to the lender.
Buyers can also face work or family-related issues. There are no guarantees that just because your life is running smoothly, everything will continue that way during your 30–45 day escrow period.
Persuading a Seller to Sign an Extension
When a buyer cannot close on time, a strategy that works well is to offer to release the buyer's earnest money deposit to the seller before closing. This presumes, of course, that the buyer is certain they can close escrow. However, if it's just a matter of a few more days, releasing the deposit to the seller is akin to putting your money where your mouth is. It says the buyer is serious and confident about closing, and it also removes doubt from the seller's mind. With money in hand, that earnest money becomes nonrefundable.
Escrow officers are typically the parties who prepare the instructions to release the earnest money deposit. The document will lay out the possibility that the escrow might never close and, if it does not, the buyer will not get a refund. Earnest money deposits are generally 1–3% of a home's sale price.