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Steve McLinden, the Real Estate AdviserWhat happens when the buyer backs out?

Dear Steve,
You recently addressed what can happen when a seller tries to cancel a home-sale contract. But what if a buyer tries to cancel on the closing date with no legitimate reason? Does the seller have a right to recoup money spent?
-- Kim

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Dear Kim,
It's much easier, as you've probably deduced, for a buyer to back out of a contract than a seller. But if you lived up to your end of the signed sales contract, there are many forms of potential redress for the time on the market you lost while you awaited closing, not to mention other lost expenses.

There have been cases where sellers sued defaulting buyers for "specific performance," whereupon courts ordered the buyers to complete the purchases. But these cases are relatively rare. More common are instances where sellers sue cold-footed buyers for expenses and the profits they lost after they had to sell their homes for less money than the first buyer's offer.

At the very least, you should be able to walk away with the buyer's earnest money, which was probably anywhere between 1 percent and 5 percent of the home's value.

While you say the buyers offered no legitimate excuse for canceling, there are several legally defensible reasons for backing out. These include the inability to obtain financing, a lender appraisal that's less than the agreed-upon purchase price, repair issues that the buyer doesn't have the wherewithal to address, a title search revealing undisclosed liens on the property and the discovery of inaccurate property boundary lines or undisclosed easements to the property, among others.

Most often, only a real estate attorney or other qualified attorney can determine if you have recourse. That's not to say that most issues shouldn't have been clarified or addressed well before the actual closing day!

In the go-go days of the sellers' market, sellers would usually accept such cancelations without forcing the buyers to live up to their agreements, often without even keeping the earnest money, because home prices were rising and several other buyers were likely on the hook.

But I sense you want to play hardball here. Many contracts these days call for dispute mediation as a means of arriving at a settlement and here's hoping your contract was one of them. The mediation route is certainly cheaper than court for both parties and it's also a faster way to arrive at a compromise and let both parties get on with their lives.

Unfortunately, the soft market of today finds thousands of buyers attempting to flee from contracts. Some fear home values will drop further and are staking their earnest money on it. Others are caught up in a chain of circumstances where they can't sell their old homes because buyers have canceled out on them. Or some have simply found that ubiquitous BBD (bigger, better deal).

Here's hoping your situation gets favorably resolved.'s corrections policy-- Posted: April 22, 2007
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