Sellers often feel that they should be entitled to keep the buyer’s deposit money if the buyer fails to complete the purchase for any reason. But, more often than not, when a home purchase transaction falls apart, the deposit ends up being returned to the buyer.
Most purchase contracts include contingencies. These are conditions that must be satisfied in order for the sale to go through. Usually, the buyer is entitled to have his/her deposit returned if he/she is unable to satisfy a contingency, depending on how the contract is written.
For example, suppose the buyers include a contingency that specifies the terms of the financing they’ll need to arrange in order to close the deal. Furthermore, the clause stipulates that if the buyers are unable to obtain that financing, their deposit will be returned to them.
They earnestly attempt to line up the financing, but are unable to do so. Maybe interest rates rose to a point where they could no longer qualify for the loan they needed. Or, perhaps their credit report turned up issues that made it impossible for them to qualify. In either case, the buyers would probably be released from the contract without penalty.
However, let’s say these buyers didn’t attempt to obtain financing. Instead, they went out and bought another house. They strung the sellers along for a couple of weeks and then claimed they couldn’t get a loan and wanted out of the deal.
In this case, the sellers could have a legitimate claim to the buyers’ deposit. But, to find out a definite answer to this question you would need to consult with an attorney – ideally one who specializes in residential real estate.
In some states, home buyers use attorneys to draft their purchase contracts and to handle the closing. In most states, however, home buyers have their real estate agent prepare the purchase contract using preprinted forms that have been drafted by attorneys. Once the purchase contract is signed by the seller it becomes legally binding, and it includes all the terms and conditions that will apply to the transaction.
HOUSE HUNTING TIP: Having real estate agents prepare purchase contracts usually works fine. But, if there is a glitch in the transaction that requires a legal interpretation, your real estate agent will not be able to help you unless your agent is also an attorney. It’s against the law for someone who is not an attorney to practice law.
Many buyers and sellers have a hard time understanding why their real estate agent who prepared the contract for them can’t advise them on such things as who’s entitled to the deposit if the transaction fails. However inconvenient it might be to consult with an attorney before deciding to lay claim to a buyer’s deposit, it’s absolutely essential.
In one case, a buyer backed out for what he thought were sound reasons. The seller asked his agent if he was entitled to the buyer’s deposit. The agent said yes. Based on this advice, the seller refused to return the buyer’s deposit. The buyer then hired his own attorney, sued the seller and won.
Residential purchase contracts often include a liquidated damages clause, which sets a limit on the damages that could be awarded to the sellers if the buyers breach the contract. A breach occurs when the buyers back out for a reason that’s not provided for in the contract.
Sellers frequently assume that if both the buyers and sellers have agreed to include a liquidated damages clause in the contract, this means that the buyers will automatically lose their deposit if they fail to close the transaction. In some cases this might be so; in some cases not.
THE CLOSING: Before jumping to a conclusion, consult an attorney.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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