Just because a home or piece of property is under contract doesn't necessarily mean that the deal will close. Many situations can cause a deal to fall through, ranging from the buyer's job loss to "buyer's remorse."
What happens when the sale of a house doesn't work out? In some cases, you as a seller can take legal action if a buyer refuses to complete a sale. Limitations as to what you can do are typically written into the initial sales agreement, and probably narrow your options, so read the contract carefully.
It's wise to stay focused on your top priority as a seller, namely to sell your property rather than to put the squeeze on the person you thought was going to but it. Even if it's the buyer's fault that the sale didn't close, getting your property back on the market and finding another buyer may be the best thing to do.
Still, it's helpful to know about your possible remedies if your sale falls through, so that you can decide what to do next. You'll want to talk to your real estate agent and possibly a real estate lawyer before proceeding.
A seller may potentially do the following if the buyer decides not to go through with the home purchase:
- retain the initial earnest money payment and terminate the contract
- sue for breach of contract, or
- bring an action for specific performance.
Make Sure the Buyer's Action Constitutes an Actual Breach
Home purchase contracts are typically full of escape hatches for the buyer. In legal jargon, these are known as "contingencies," and while they're usually used legitimately, they can also be used by buyers who've simply gotten cold feet.
Financing contingencies are commonly reasons for canceling a home purchase contract. If the contract is conditioned on the buyer successfully obtaining a mortgage on acceptable terms, and the buyer makes a good faith effort to apply for one but is then turned down, then the contract is canceled and the buyer is not at fault.
Inspection contingencies also frequently result in deals not closing. Your buyer, if careful, is likely to have insisted that the contract include a clause conditioning the sale on him or her not only hiring a home inspector, but being satisfied with the results of that inspection. If the inspection turned up defects (as they all do), and the buyer is not willing to deal with those defects or the two of you can't successfully negotiate over repairs, the deal is over and the buyer is not in breach of the contract.
Other contingencies may bring about similar results.
Only One Remedy Allowed at a Time
In most situations, an aggrieved home seller can pursue only one legal action at a time. If one remedy fails, though, you may be able to file another lawsuit for a different reason. Remember, your sales contract may limit your options.
For example, the contract may state that if the buyer fails to close without good reason, you are entitled to "liquidated damages," which is a set amount of money, and that you are not allowed to pursue any other legal remedies.
It's important to know that if you choose to file a lawsuit, the buyer may file a "lis pendens" in the public records. This notice shows that your property is involved in a lawsuit, and you won't be able to sell your property during this time. Potential buyers won't likely make offers, and most won't even look at your property, knowing that it could be tied up in the courts for some time.
Seller Keeps Earnest Money Payment
When the seller is ready, willing, and able to sell the property and the buyer refuses to close on the sale (for a reason not excused by a contingency), the seller has the right to terminate the contract and keep the earnest money payment (called a downpayment in some states, such as New York, but not to be confused with the 20% down payment that most buyers make at closing).
This is usually legally valid even if the amount of the down payment is more than the amount of any damages to the seller caused by the breach. It is also valid if the seller has resold the property to another person for more money than the original contract price.
When the seller doesn't abide by the contract, or if both buyer and seller are in default, the buyer usually gets the earnest money payment back.
Seller Sues for Damages
A seller may bring a lawsuit against the buyer and ask for money damages when a buyer has not done what was agreed to in the contract. The amount of the damages the court may award will be based on the difference between the contract price and the market value of the property at the time of the breach, less any down payment or other payment already made, plus interest from the date of default.
Seller Sues for Specific Performance
A lawsuit for specific performance involves the person claiming a breach of contract asking the judge to order that the transaction be completed according to the terms of the contract, rather than ordering a payment of money damages.
A seller does not have a contractual right to specific performance; whether or not to grant specific performance is up to a court, and it's rarely granted.
A court may consider granting specific performance if the contract is clear and definite and an award of money will not return the individuals to the positions they were in before signing the sales contract.
If the agreement is definite in all of its essential elements, specific performance can be granted. Essential elements of the contract typically include the purchase price, deposit amount, legal description of the property, financing terms, closing date, and effective time period of the contract.
In most states, the seller has an implied equitable lien on real estate that has been transferred to the buyer for any part of the contract price remaining unpaid. The lien is a right to have the unpaid balance paid out of a sale of the property.
Questions for Your Attorney
- I'm upset that the buyer didn't close on the sale of my house without good reason and I want to sue, but is this a good idea?
- How does the failed sale of my property affect my listing agreement with my real estate broker? Do I owe a commission or can I just cancel that contract? I want to take my property off the market for now.
- If I find another buyer and close on the sale quickly, can I still sue my first buyer for breaching the sales contract? The first buyer's failure to close did cost me time and money.