Fall 2011 Mortgage Trends
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Home purchase fell through -- now what?

Mortgage Trends » Home Purchase Fell Through -- Now What?

Most homebuyers sign real estate purchase contracts in good faith, but sometimes not even the best of intentions can ensure the deal will close. If the home purchase "falls out," to use a bit of real estate lingo, a buyer might wonder how that will affect the ability to buy another property from a different seller.

For most buyers, the top concern is the return of the earnest-money deposit. Whether that will be refunded in full, in part or not at all depends primarily on the status of contract contingencies at the time the deal fails. A home inspection, an appraisal and the buyer's ability to get financing are examples of common contingencies.

Buyers who exit through a contingency are entitled to their deposit, says David Moody, a broker at ERA Sunrise Realty near Athens, Ga.

For example, he says, "In most cases, if the buyers fully inspect the home on their own account in that time frame, and they can't get everything worked out (with the seller) on repairs, and they want to terminate, they can do it and get a full refund."

Phyllis Yanagihara, a certified senior escrow officer with Master Escrow in Glendale, Calif., offers another example. A buyer who wanted to purchase a condominium as a rental property made closing the deal contingent on his approval of the homeowners association documents. When he discovered, within the allowable time, the association prohibited rentals, the deal was canceled and his deposit was returned.

Left in dispute, however, was several hundred dollars the escrow company had paid the association to get the documents. The buyer balked at the expense, the seller refused to pay it, and in the end, Yanagihara says, her company had to absorb the cost as a courtesy.

Waltz in, waltz out

Buyers sometimes harbor the misconception that a real estate purchase contract can be entered into lightly and then easily exited due to the contingencies.

"A lot of buyers who (aren't told) upfront how the procedures work think they can waltz in and terminate and get their money back," Moody says.

But that's not the case.

Local real estate practices affect who gets the buyer's deposit.

In Southern California, an escrow company can't disburse funds without signed instructions from the buyer and seller, says Yanagihara. In Georgia, one of the real estate brokers usually holds the deposit and makes the call, based on the contract terms. If the broker's judgment is disputed, Moody says, the deposit could get tied up in court and a judge will make the final decision.

Buyers who are determined to purchase a particular house despite the seller's breach of the contract have one other option, which is to sue for what's called "specific performance." Prevailing in such a lawsuit could force the seller to complete the sale. Such cases are rare due to the time and expense involved, Moody says.

Rental considerations

First-time homebuyers who occupy an apartment might be concerned about their existing rental agreement. Most resolve that issue by waiting to give notice to their landlord until they're certain their home purchase will close, says Carolyn Hastings, a broker associate at J. Rockcliff Realtors in Blackhawk, Calif.

"They're being cautious, even though they might have to eat a couple of weeks' or a month's rent," she says.

Homebuyer blues

Disappointment can be another issue for buyers. Some opt to stay away from the housing market at least for a while after a failed purchase, while others want to jump back into buying a home right away. Which reaction gets the upper hand usually depends on the buyer's original motivation, Hastings says.

Buyers who were tripped up by an inspection report tend to suffer less acute disappointment than those who stumbled over financing, Moody says, because repairs are specific to the property, while a loan is specific to the buyer. Buyers with financing issues might have to settle for less-costly homes or delay their plans.

"Maybe," Moody says, "you need to rent a little while longer, or drop your price so it's more manageable for you."

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