Why Do Real Estate Contracts Fall Apart?

Whether you’re buying or selling a house, once you’ve signed on the dotted line, you’ve agreed to the terms of a contract. So, why do people back out and how can you prevent your real estate transaction from falling apart?

First, there are two types of backing out: those explicitly allowed within the contract (known as contingencies) and those outside the legal allowances of the contract.

Why Buyers Back Out

When buyers submit an offer to buy a house, they often include two main contingencies. They agree to buy the property if 1. They can secure a home loan, and 2. That the results of inspections do not reveal problems with the property they do not care to deal with (either because of hassle or expense—or both).

However, with life being unpredictable, sometimes buyers want to back out of a contract because of unforeseen circumstances. Maybe their out-of-state job offer is revoked. Maybe a spouse passes away. Or, maybe, the buyer just gets cold feet. In these cases, the seller has legal recourse to collect damages.

Why Sellers Back Out

When sellers sign a purchase offer, they sometimes include contingencies of their own. They may need to find a replacement house before selling this one, whether it is a new primary residence or a replacement investment property suitable for a 1031 exchange (learn more about 1031 exchanges at selzerrealty.com/2013/12/23/1031-exchanges). If the sellers are carrying financing, they may include a contingency on the buyer’s creditworthiness.

It’s generally harder for sellers to cancel a signed agreement than it is for buyers. Sellers cannot back out because they find out that the buyer is a jerk, and they feel bad about letting this person into the neighborhood. They cannot back out because they discover the buyer plans to grow cannabis, which goes against their personal ethics. They certainly cannot back out because they want to discriminate against protected classes such as ethnicity, age, sexual orientation, disability, or others.

Sellers do have a bit more discretion before they sign an agreement. Through deed restrictions, sellers can limit the use of a property. This is usually done with commercial property to prevent competition, such as a restaurant owner including a deed restriction preventing the property they’re selling from being used as a restaurant that would compete with the place they’ve just opened down the street. However, deed restrictions can be used for residential property. I’ve been asked whether sellers could prevent buyers from owning certain types of pets, like breeds of dogs with a reputation for aggression. That would be an interesting question for a court to decide.

As with buyers, sellers can also face unexpected life circumstances that cause them to change their mind about the agreement they signed. Sellers may see a shift in the housing market and regret selling at such a low price. Economic markets may take a tumble, causing their retirement fund to lose half of its value overnight, making their move to Hawaii too expensive. They may get cold feet about downsizing or leaving the neighborhood. Without specific contingencies that address these issues in the contract, these are not valid legal reasons to cancel an escrow.

Sometimes, the death of one of the sellers can slow the escrow process to the point where both parties agree to cancel an escrow. If both parties agree to cancel an escrow, everyone’s off the legal hook.

When the Courts Weigh In

Sometimes when sellers want to back out but have no legal way to do so, they become uncooperative in hopes of delaying the escrow indefinitely. For example, they do not make the property available for inspections or appraisals, or they refuse to work with the title company to remove incidental issues.

In this case, the buyer can give the seller a notice to perform, requiring the seller to move things along. If it is time to close escrow, the buyer can give the seller a notice to close. If the seller doesn’t comply with these notices, the buyer can take the seller to court for “specific performance,” forcing the seller to comply with the agreement. If the seller won’t sign over the deed, the judge will do it for him.

So, the moral of the story is to read all contracts carefully and to include contingencies if you need to. As I’ve always said, the big print giveth and the small print taketh away.

If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 45 years.

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