Selling issues

A - Cancel the Contract: How can buyers (or sellers) can get out of it?

The most common way a contract can be terminated (without a closing) is when a contingency is not met within a specified date.

Buyers who specify too many contingencies, or  “subject to” conditions give cause for alarm. Are they inserting too many “weasel clauses” so that they can easily get out of a contract? 

Contingency types:

Buyers can legally get out of a contract because they fail to get approved for financing, they are unable to sell and/or close on their house within the necessary time frame, you and the buyers cannot come to an agreement on the proposed resolutions of the whole house inspection, etc. These are common contingencies. 

A buyer can request that the sale be contingent upon his or her spouse approving the house. This situation arises when a person transfers into the area and the spouse has not seen the home before the offer was made and accepted. A sharp buyer will request, say a week, for the spouse to visit and approve the purchase. The buyers, in effect, buy a week of time. The problem is a more desirable property could come on the market that would make the buyers want to switch.

Failure to meet a contingency:

Failure to meet a contingency usually results in the contract being voided and the earnest money is returned to the buyers. But not always, as the purchase contract may provide that the earnest money is forfeited to you in certain circumstances, as specified in the contract.

Should the buyers simply change their mind about fulfilling their contractual obligations, then you would probably get to keep the earnest money. If there is a real estate listing agreement involved, the fine print may say that forfeited earnest money will be split with the agent or go to pay for an agent’s expenses (advertising, fliers, brochures, time, etc.). 

The (hidden) killer contingency:

The closing date is often overlooked as a legitimate contract killer. Usually the buyers will apply for a loan and get approval–but with a rate that is locked in until a certain date that is typically 60 days out.

Suppose the rates jump considerably before closing. No problem, because the buyers’ rate is locked in. But what if something comes up and the closing is delayed for a couple of days? If the new closing date is rescheduled after the buyers’ lock date, the new (higher) rate will take effect and could kill the deal. The buyers can’t get financing. The financing approval contingency that had been met is now reversed, a real deal killer.

You can avoid this by checking with the buyers’ lender to see if the close date would be impacted by the lock-in date. Make sure the lock date gives you some room, say, a week or two should the need for a delayed closing arise. If not, contact your attorney to help arrange for the close date to be moved up.

Legitimate cancellations

The contract could specify different situations that could legally void a sale. If one party dies or the house is partially destroyed in a fire, flood or some natural disaster, this could be spelled out in the contract or subject to negotiation and resolution by the partys or if necessary, the courts. State laws may also cover specific (and unusual) situations. 

Attorney approval contingency:

In many areas, the sales contract contains an ”attorney approval” clause, a provision that allows each party to have their attorney review the contract and make suggested revisions within a few days after acceptance. 

Buyers who change their mind about purchasing a house could have their attorney start suggesting (demanding!) ridiculous changes to the contract, such that the revision changes would never be acceptable to the seller, such as delaying closing for years or reducing the earnest money to $100.

This is obviously a highly unusual use of the attorney review contingency, but it can be used to kill the deal. On the positive side, the short life of this review condition allows the sellers to quickly regroup and start remarketing the property.

If the buyers want to squash the deal, with or without an attorney, they can make ridiculous demands based on issues raised during the home inspection.

The attorney review contingency is also covered in the NEGOTIATE section under the Contingencies topic.  

NOTE:

Don't think that sellers can simply get out of a contract because they receive a better offer. They'd be in breach of contract and open themselves up to a losing lawsuit.