How to Deal with a Home Buyer that Defaults

Posted by Steph Kaye on Monday, December 29th, 2014 at 2:30pm.

Default occurs when the buyer in a real estate transaction does not perform according to the terms specified in a purchase and sale agreement. In most purchase and sale agreements, there is (or should be) a clause that dictates the options a seller has in case of default.

First to define “default”-When a real estate contract is entered into, it often contains certain contingencies – such as obtaining a satisfactory home inspection, or getting a firm loan commitment, or even selling the purchaser’s home. These contingencies should include time limitations, whereby if the contingency is not removed within a certain time frame, the contract will either become null and void or will become a valid and binding contract. The specific contingency will usually spell out the consequences of not meeting the time deadlines.

When there is a contingency in a sales contract, a buyer will not be in default should the contingency not work out. For example, the buyer signs a contract to purchase your house, and the contract is contingent on the buyer obtaining financing. So long as the buyer promptly makes application for a mortgage loan, if the buyer is unable to obtain the necessary financing within the time spelled out in the contract – and advises the seller in writing of this fact – the contract will usually become null and void. Under these circumstances, the earnest money deposit will be returned to the buyer and there is no default.

But, whether you are a buyer or a seller, you want to make sure that any contingencies which are contained in the sales contract are well-drafted. You also want to keep a calendar so that any time limits are not missed. Once all contingencies have been removed, both the seller and the buyer have the legal obligation to go to settlement. Usually, the sales contract will contain a specific date when settlement must take place. The seller may want to add language in the contract that all time limits contained in the contract are “time of the essence”. This generally means that if the deadline passes, there will be a default.

Buyer Default

If the buyer defaults, generally the seller has three alternative solutions:

  •  Keep the earnest money deposit. A potential buyer who signs a real estate contract generally gives the title attorney or the real estate agent between 5 and 10 percent of the purchase price. This is known as the “earnest money deposit”. It is a show of good faith on the part of the buyer that they are serious in wanting to purchase the property in question. A seller would like 100 percent of the purchase price as this deposit, while a buyer would only like to sign a promissory note and shake hands with the seller.

  • Sue for specific performance: There is a legal right for the seller to file suit against the buyer, asking the Judge to order that the buyer actually go to closing. This is known as an action for specific performance. Legal actions take time and are expensive. But if the buyer is financially able – and for example if the property values has declined – this is a possible alternative for the seller to consinder.

  • Bring a lawsuit for damages: Let us assume that the sales contract called for a $500,000 purchase price. After the buyer defaulted, the seller was only able to sell the property for $400,000. The seller has the right to file a lawsuit against the buyer for this $100,000 loss. Damages would also include any carrying costs which the seller had to absorb until the property was in fact sold to someone else.

Once again, litigation is time consuming -- and unpredictable.

These are the basic solutions which a seller has on the default by the buyer. Smart buyers will generally want to limit their exposure by emphasizing in the sales contract that the seller can only keep the deposit, and not be able to assert any of the other two options.

Smart sellers, on the other hand, will want to keep all options open, and try to get as high an earnest money deposit as possible.

Default should not be taken lightly. Nor should it be asserted without giving the defaulting party an opportunity to cure the default. Regardless of the merits, litigation is both time consuming and expensive. Before you sign a purchase and sale agreement, make sure you understand the options available to you in case your buyer defaults and make these intentions known. Consult a real estate or contracts attorney if you are ever unsure.

If you would like information on your local real estate market, or are first time home buyer not working with a Realtor and would like to schedule a consultation with a qualified Oakland County and Macomb County Realtor, please complete the Lang Premier Properties contact form to have a real estate agent contact you.

Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang.  Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate. you would like information on homes for sale, or are first time home buyer not working with a Realtor and would like to schedule a consultation with a qualified Oakland County and Macomb County Realtor, please complete the Lang Premier Properties contact form to have a real estate agent contact you.

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