Friday, November 28, 2008

What happens if a buyer cannot close on a real estate purchase?

I had a very good question asked today and I will show the question and my answer below.

The question was:
Hi Mark,
I've read your article regarding sale and purchase agreement.
It is very helpful and professional article.
I have one question, what happens in case of cancellation after all conditions went through? Lets say, after certain amount of time there are financial difficulties and there is not enough money for the closing.
Thank you a lot,
Have a great day,

This is my answer to this situation:

Hello T.,

Thank you for your kinds comments about my site.

Your question does not have a simple answer. There are many options and obligations open to each party when a purchaser does not have funds to close. First, I must tell you, if this is your situation, you must consult your lawyer for professional advice in this situation, this is a very serious situation and requires a lawyer to interpret and advise when a buyer cannot or does not close.

Many believe that the deposit is automatically forfeited to the seller if the buyer does not close. Nothing could be further from the truth. The deposit is only a sign of good faith in the transaction and remains in the real estate broker trust account until there is a mutual release, court order or a successful closing. There are a few other ways a deposit comes out of a trust account, but these are the main methods.

In my experience, some of the options open to one or the other or both parties when a buyer cannot close are:

  • One option is to mutually release each other from the sale and sometimes the purchaser compensates the seller in some way.
  • Another option is to put the property back on the market, try to re-sell the property and depending upon whether the property sells for more or less than the original sale, and taking into account other expenses, the original purchaser and seller can come up with a compromise
  • The seller can tender on the purchaser to close the transaction and if they do not close the seller can sue the purchaser for specific performance for not completing the transaction as per the terms of the original agreement of purchase and sale. Again, this is complex and legal advice is required.
I think in all cases where a buyer cannot close on a sale, the seller should try and re-list the property back on the market, get the real estate board to reverse the previous reported sale and remove all the sale information, so agents no longer see what the original sale price was and try and re-sell the property.

I hope this helps.

Read more about the agreement of purchase and sale at this page:

Please let me know if you have other questions,

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