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Default is when either party to the real estate transaction decides to back out with no cause. It becomes a default after all contingencies have been cleared. If a contract is cancelled due to a contingency not being met, like finance failing, that is not a default. A buyer default is often the result of home buyers remorse.
Reasons for a Buyer Default
Because a default is related to contract stated deadlines, it does not always mean they default at the close. There are several deadlines in most contracts for purchase of a property. Each state uses different contracts but they are more or less the same.
- The most common is buyers remorse and this can happen at any time during the contract process and for many reasons.
- A buyer fails to deposit earnest money.
- If a buyer does meet meet the timed deadlines per the sales contract and does not request they be extended, this is a buyer default.
- Buyer fails to complete inspections on time.
- Buyer fails to apply for mortgage within stated timeframe.
- Buyer fails to produce personal funds at close. Or insufficient funds to close.
This is not an exhaustive list but the most common.
Curing Buyer Defaults
Many of these defaults can be cured, some fall in favor of the seller. Some are more about missing contingency deadlines.
Here in Northern Illinois we use attorneys for real estate sales. It becomes there legal responsibility to watch the deadlines, from both sides, to make sure they are met. A good Realtor will also be monitoring the process and will start asking whether contingencies will be met, when those dates get close.
As an attorney state, your attorney will ask for an extension if it looks like the contingency will not be met on time. Commonly the extension requests are for inspection issues and financing.
If a buyer misses a contingency deadline, he may be forced to proceed regardless. For example if the buyer forgets to get his inspections done in the allotted time, he may not be allowed to ask for remedies.
The only true default occurs when the buyer is cleared to close a purchase and chooses not to proceed or does not have sufficient money to close. This is when all contingencies have been met, there is nothing left to do except close the sale/purchase.
A default may also happen if the buyer is getting a mortgage but loses his job prior to the close date. Because of the mortgage meltdown a few years back and the economy sinking, most lenders now call employers within 48 hours of a close to be sure their prospective borrower still has the job that’s going to pay the loan. Without they’ll withdraw the loan. This is not the buyers fault, it is out of their control. we have even had cases where the buyer did not know he had just lost his job. What a way to find out!
True Buyer Default Resolutions
Let’s look at a real default. This is a recent sale of mine in 2018. I represented the home seller. The sale did not complete.
Just two days before the closing we were notified that the buyer was not going to proceed. There was a specific reason but it falls under the hat of Buyers Remorse. Essentially the buyer changed her mind. She had her reason. During the time of contract the property was off the market. We had no more showings and even if we did have another offer it would have been a back up offer only. Yet we did not have any other interest and the sellers expected the sale to happen.
The seller was responsible for maintaining the property which in this instance was vacant. It took 4 months for an out of court agreement to be reached and in the end it was simply the earnest money being given to the seller.
Attorneys New Buyer Default Clauses
I am seeing a lot of agreements during the attorney review that limit any defaults to the earnest money being paid to seller rather than a seller taking a buyer to court. Many are agreeing to it. I am not telling my sellers to ask for more earnest money!
Can a seller sue a buyer for breach of contract? Yes.
Whether it is a buyer default or a seller default, if there are no other agreements in place such as stated above, the suffering party can choose to take the earnest money, just let it go and cancel the contract, or take the opposition to court.
The earnest money only helps a seller who experiences a buyer default. If a seller default there is no money for the buyer other than the return of his own money.\If a party chooses to take the other to court it can take a long time, cost a lot of money in attorney and court costs and it’s in the hands of the attorneies and judge to decide the case and award damages or not.
During any real estate default court case, a property seller cannot simply put his property back on the market for sale. It is the subject of a court case and because there is a potential lien to be placed against the property, the title is not clear to sell. So the property remains off the market and the seller continues to support it, pay taxes, HOA fees, utility and so on.
- Buyers must decide if defaulting on a purchase is worth the risk of being taken to court. They may be forced to buy the property.
- Sellers have to decide if taking the buyer to court is worth the cost, time, expected result.
Buyer default is not to be taken lightly. Buyers should never assume it’s an easy way out. Take legal advice from your attorney, know the potential consequences before you do this dastardly deed.
Seller Default Real Estate Contract – Yes this happens too and the remedies are really the same. A buyer can go to court and force the seller to sell, or he can agree to cancel. The earnest money gets refunded but there’s no additional funds unless some kind of agreement is made.
How To Avoid a Buyer Defaulting a Real Estate Purchase
The property seller should consider the possibility of a buyer default when reviewing any offers made on the property. The earnest money is to show good faith and intent on completing the purchase. Given the possibility that your attorney may agree to earnest money being the sole remedy, is it not wise to consider this in terms of what would be acceptable to you in place of a closing?
In other words compensation while you start the sales process all over again. Many of our earnest deposits are very small today. $1,000 is common at the lower end of the market yet it’s not enough to cover your expenses, let alone time off market or costs on a vacant house. In our case the earnest started at $5,000 and was increased during contract to $10,000.
Your attorney likely will be asked by the sellers attorney during the attorney review. It’s after you’ve agreed to accept the earnest money stated in the purchase agreement/offer. Yes you can agree and go back and ask for an increased amount but that may be denied. I consider it better to ask it at the beginning.
Considering most buyers are contributing more than 3.5% from their own funds, often a lot more, do the math and see what this equates to. Ask your agent for some input too!
Buyer Defaults on Home Purchase
A buyer should never be making offers to purchase real estate without doing due diligence and really thinking it through. Buyers remorse is one thing, moving the next step to a default is far more serious.
Never rush into a purchase. Take the time to do any research, cost out needed improvements and be sure your finances can support any loans, charges, fees and deposits needed, before you start making formal offers. When you decide to buy you should not continue looking at other property. That’s the first sign of dissatisfaction with your choice.
If you end up defaulting, you did not think it through enough. It’s better to put the brakes on before you make an offer. A buyer defaulting on a property purchase, no matter if it’s residential, commercial, land or any other real property, can lead to a messy end and could cost you, the buyer, a lot of money.[su_button url=”https://realestateinbarrington.com/contact-us/” background=”#282865″ size=”6″ center=”yes” radius=”10″ icon=”icon: search”]Contact Us For Help Buying Real Estate in Barrington and Making The Best Decision.[/su_button]