Tuesday, February 5, 2008

Attn Buyers: Backing Out of Purchase Might Cost You

798068_justice.jpgAttention home buyers:  did you know that if you back out of a home purchase you could be risking more than just your Earnest Money?

The key to how much Buyers risk by backing out is the timing.

Most buyers know they can back out of a home purchase during the inspection (Due Diligence) period without penalty. You fill out a form stating why you're walking, and you walk, Earnest Money in hand.

But what if the Buyers get cold feet at the last minute? What if they just don't want to buy the house anymore? Let's assume the Buyer's loan was approved, the house appraised for at least the purchase price, and there's nothing materially wrong with the home. The Buyers just felt a little icy about the toes. This is known as a breach of contract, and it can be quite expensive.

In that case, the Buyers could potentially lose a good deal more than just the Earnest Money. Lines 275 to 282 of the AAR Purchase Contract say: "In the event of a breach of Contract, the non-breaching party may cancel this Contract and/or proceed against the breaching party in any claim or remedy that the non-breaching party may have in law or equity....  In the case of the Seller, becasue it would be difficult to fix actual damages in the event of the Buyer's breach, the Earnest Money may be deemed a reasonable estimate of daages and Seller may, at the Seller's option, accept the Earnest Money as Seller's sole right to damages...."

Read that carefully again: the Sellers may take Earnest Money in lieu of damages. But they might choose to ignore the Earnest Money and pursue the Buyers for actual damages.  Actual damages could involve mortgage payments, carrying costs like heating & cooling expenses, the increased marketing costs associated with putting the house back on the market, mediator or attorney fees, and the like. 

In today's market where most Valley homes are depreciating at about 1/2% to 1% per month, the Seller's loss could be quite high. If it took 3 months to find the Buyer who's now backing out, it could take many more to find a new buyer. And the new buyer will likely pay less for the home because time has passed and the market has slipped a little further.

In our current correcting market, it's not impossible to believe a Seller could get angry enough to consider mediation or a lawsuit. Buyers: make sure that any cold feet you get happen before the expiration of your inspection period!