Home Buying in 95125>Question Details

Sonia, Renter in San Jose, CA

When is a buyer allowed to cancel a contract during the contingency period and receive their earnest money back?

Asked by Sonia, San Jose, CA Tue Sep 18, 2012

We are selling our house in San Jose. We had 3 inspections completed (extensive property inspection, termite and roof) and reports ready to show potential buyers before our house even went on the market. Garage had been converted to a finished room (without permits, but this was listed in detail on the property inspection report). We received and accepted an offer for the asking price. The buyers have now submitted a Cancellation of Agreement within the 10 day contingency period. They specifically told their agent that they have decided that they "want a garage", although the specific language their realtor used in the email was that "the property needed more work than they are willing to do". Who would be entitled to the earnest money in this case? Our realtor is not really doing much on our behalf. Meanwhile, our house was taken off the market, sits empty while we are still paying the mortgage and rent on the new place. Should we hire a real estate attorney?

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Answers

17
The buyer is allowed to cancel for any reason within the stated contingency period and get their deposit back. It's a hassle, but if they are within their contingency period, you have no right to that deposit.

Wishing you all the best/
1 vote Thank Flag Link Tue Sep 18, 2012
Cally,

Your home needs to get back on the market as soon as possible. Your core issue appears to be that the relationship between you and your agent is not working to your satisfaction. Here are the steps I would recommend you take and the timeframes.
1- Tell your agent you want to sign a "release of contract", today
2- Once that is signed, since we know the Buyer will sign it, tell your agent whether you want to continue working with them or not.
3- If you don't want to continue working with them, state your reasons, keep it simple, and don't get into a debate, just ask them to send you a cancellation of listing agreement within 24hrs. Follow up your discussion with an email requesting same.
3a- If they won't agree to do that, or don't do it within 24hrs call the office manager or broker who they work under. The listing contract is actually between you and the brokerage, not the agent. State your reasons for wanting to cancel again, I would recommend you focus on the core intangible issue, which is a breakdown in trust. Whatever the outcome of that conversation, document it very briefly and concisely in an email to the broker.
3b- If the broker won't agree to get you the release from contract within 24hrs or say they will but don't, you may want to call me or one of the other agents that have replied here. Your decision.
4- Chances are very high that the agent will sign the release and even higher that the broker will. As soon as they do, call me or one of the other agents that replied. We will discuss how to get your home back on the market immediately.

I hope that helps!

Stu Carson

408-209-0849
http://stucarson.com/AboutTheTeam
http://stucarson.com/testimonials

http://getrealrealtor.com
1 vote Thank Flag Link Tue Sep 18, 2012
Hi Cally,

You have received excellent advice below. At this point focus on moving forward. If you are not satisfied with your listing agent, get his broker involved in the process. You must have signed a contract with the listing agent as well. So open up the communication and get your house sold.

Yes there are areas where the demand for homes is very high, however, there are also many areas where the market is balanced. We do not know where your home is situated, how long it has been on the market, what are the comparative sales and how was the traffic to your home when on market. Did you have other interested buyers and perhaps can generate a backup offer? I hope things will work well for you.

Good luck
Monica Goyal
Realtor
Coldwell Banker
408-476-0675
DRE 01781926
1 vote Thank Flag Link Tue Sep 18, 2012
As stated we can't give legal advice.

To sum up what has transpired is that the Buyer is still within their inspection contingency. The Buyer probably always wanted a garage but in their inspection period find out that turning the garage back into a garage was going to be a bigger problem then anticipated to them. To push keeping the deposit you would need to prove that the buyer isn't acting in good faith and that you have suffered a loss. To do this may take more time and money then it would be do just move on and get a better buyer and better offer.

If you are not satisfied with your agents answer, call their broker and have a conversation about what options you have based on the specifics in your contract and what has transpired.

All the best to you.
Web Reference: http://www.terrivellios.com
1 vote Thank Flag Link Tue Sep 18, 2012
Hi Cally,

Per contract, the buyer has the right to cancel contract within the contingency period to receive their EMD back. This sounds like a case of buyer's remorse. Although they know the garage is converted, perhaps they brought a contractor out to examine turning the conversion back into a garage. Perhaps the cost was more than they want to pay. They still can cancel contract knowing that there is a garage conversion. It is all under the "Property Condition Contingency".

I'm really sorry to hear about he canceled contract. My advise to you would be to ratify the cancellation of contract; from there you can get your house back on the market. you are not allowed, per contract, to market your house until you have canceled contract.

On a very positive note ... the house will sell!! It is a HOT market and bringing it back to the market will yield more offers!!

Call me if you have any questions.

Sara Greenwood
Sereno Group
408-655-5262
sara@saragreenwood.com
1 vote Thank Flag Link Tue Sep 18, 2012
With the caveat that we cannot give legal advice, under most contract inspection contingencies these are not limited to physical inspections. From your rendition of events they cancelled within the prescribed time under the inspection contingency, I think you will likely find it impossible to win a dispute over their deposit. You can consult a real estate attorney to get a firmer opinion after he/she has reviewed your contract.
1 vote Thank Flag Link Tue Sep 18, 2012
1. You Waived Your Contingencies

In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding financing or an inspection. You might be tempted to do the same if you’re really after a particular property. It will make you a more attractive buyer, but it also comes with serious risks. You guessed it, you might lose your earnest money deposit.

The financing contingency guarantees that you will get your money back if the financing is not approved. With the inspection contingency, you can declare the contract null and void (and get your deposit returned) if there are issues uncovered in the home inspection that make you change your mind about purchasing the home.

If you waive all your contingencies and there are financing or home defect issues, you will not be able to get your deposit back if you abandon the deal. Therefore, you may not want to waive the inspection contingency unless you’re planning on tearing the property down. Or, if you think you will be in a competitive offer situation, you could do an inspection before submitting an offer. That way you know ahead of time if there are any serious issues with the home that would prevent you from purchasing it, and can submit an offer with the home inspection contingency waived. As for the financing contingency, waiving it may be the only way to compete with all-cash buyers. However, you have to be absolutely sure that you’ll be able to get approval from the bank.

2. You Ignored the Timeline Outlined in the Contract

Your contract usually sets specific timeframes in which you need to secure financing and do any inspections. If you try to void the contract after any of these deadlines have passed, you could lose your deposit. Generally speaking, as long as you’ve made a good-faith effort to adhere to the timeline, sellers will grant a reasonable extension if the lender needs more time or there are other extenuating circumstances that delay things. Any extension must be made in writing and signed off by both the seller and the buyer.

3. You Get Cold Feet

If you have a change of heart about the home you’re buying, but there’s no problem with the property or the financing, you likely will not get your deposit back. The earnest money deposit serves as protection for the sellers when they take their home off the market. If late in the game you decide that you no longer want to make the purchase, they get to keep it as compensation for the time and money they have to spend on listing their home again and looking for another buyer.

However, if you do change your mind, you may not be limited to losing the deposit only. The sellers could sue you for specific performance and all the tertiary costs that go with that, including their legal fees. For instance, let's say the sellers moved out of the house and that they staged the home by bringing in additional furniture. When the house goes under contract, they move the furniture out so that they don’t incur further staging costs. If the buyer backs out due to cold feet, think of the additional costs that the seller now bears, which could be more than the cost of the deposit. You could be responsible for these costs as well, so be careful.
0 votes Thank Flag Link Fri Mar 18, 2016
There are several reasons for having inspections done before putting your house up for sale.

1.) Buyers have a much better picture of what they are buying.
2.) You can have repairs done to make your house more attractive.
3.) You can counter any offer which has contingencies.

Backing out of a purchase agreement because of a contingency is not a breach of contract. Even though the reasons given by the buyer may not have been directly tied to the contingencies in the purchase offer, the contingencies could easily provide them with the ability to not complete the purchase.

I'm sorry to hear you were caught up in this emotional nightmare. Your agent should have been discussing your options. It isn't clear whether your realtor disappeared or you want a second opinion. If your agent disappeared, he lost the relationship that is necessary to sell your home.

The good side of this is that it looks like there are no obligations or uncertainty of outcome that would prevent you from again putting your house up for sale.

I wish you success,

Juliana Lee
650-857-1000
Top 3 agent nationwide at Keller Williams Realty
-
Web Reference: http://www.julianalee.com
0 votes Thank Flag Link Tue Sep 25, 2012
Hi Cally:

First, I'm sorry that this is happening to you, and that you may not have been properly advised about the sale with your current real estate agent. I think you already know the answer to your original question about releasing the buyer, and will take action to do that.

As far as the market is concerned, however, I'm going to mirror those comments made by a very astute Monica Goyal below, and that is that there are many areas within the Santa Clara County that are experiencing a fast paced market even in the Autumn, and there are areas within the same community that are definitely more balanced. The key to determining which areas are seeing the most demand are often coupled with those schools that have excellent API scores. We have definitely seen a shift in the market in the past few weeks, and a palpable slow-down in buyers, but there are still buyers out there who were priced out of the market in the summer months and are still prepared to take advantage of extremely low interest rates now. What we are no longer seeing, however, is the buyer "craze" from the summer that pushed market prices up (sometimes as much as 20 percent higher than list) and out of the reach of many buyers looking to find homes.

As far as working with your listing agent, only you can determine if you want to continue that relationship. If you do, as Stu mentioned, you need to set ground rules to ensure that your needs and expectations are being met. If you feel this agent can't or won't do that for you, then talk to the broker to request a new agent from the same firm. Much like a dance, it might take time to find a great "partner" to complete the home sale "dance." Although I understand your frustration (and even though I'm also a Realtor too), I would try to work with your current Realtor and real estate brokerage before finding another agent. Continuity at this critical time can be more important than jumping to another agent. Okay?

Good luck! I'm sure that you'll find a great buyer soon!

Sincerely,
Grace Morioka
0 votes Thank Flag Link Tue Sep 18, 2012
Hi, Thanks to all who have responded to my question so far. That's very interesting that a few have responded as to this being a hot seller's market, because that is not the advice we are receiving from our agent. (He did say that at first, but once we signed with him, he completely changed his tune). At his insistent urging, we have already lowered our price quite a bit.... I guess that is why this makes this even harder for our situation with the buyers backing out. Thank you to everyone for their advice!
0 votes Thank Flag Link Tue Sep 18, 2012
Cally: If the home is priced appropriately, the buyers will come to you.
SOunds like a good time to meet with agent and share your concerns!
Flag Tue Sep 18, 2012
Cally,
If your home isn't selling in this market it was overpriced to begin with. Sounds like you may need to cancel the listing agreement with your current agent and hire someone that you can trust. I specialize in WG. This is a soft contact ... if you're interested in just talking give me a call. It is a VERY HOT market and there is very little inventory. Homes are flying off the market if they are priced well and marketed well.

Best of luck to you!! Your house will sell!!!

Sara Greenwood
Flag Tue Sep 18, 2012
Whether or not you are entitled to deposit money depends in how the contract was written which should be explained by your agent.
0 votes Thank Flag Link Tue Sep 18, 2012
As long as contingencies were not removed, the Buyer can back out.

I hope you get more than the asking price this time, in this hot selers market.

Jacob
NMLS 327086
0 votes Thank Flag Link Tue Sep 18, 2012
I don't think a attorney will help, at least based on your description of the situation. Your own inspections minimize a chance of the buyers finding anything new during the contingency period. At the same time the buyer has a right to investigate the property and walk away for any reason during the property condition contingency period. Sorry about your troubles but it seems that the buyer acted withing their rights. Your realtor really can't do much in this situation.
Web Reference: http://talisrealestate.com
0 votes Thank Flag Link Tue Sep 18, 2012
Thank you, Cally for your question:

You have received excellent advice from Sara Greenwood and Lance King.

I recommend that you agree to sign the instructions to release the deposit back to the buyer and demand that the buyer sign a release of contract so that you can get your house back on the market as soon as possible.

Even though the garage conversion without permits was disclosed, the buyer often does not understand the consequences of that until the buyer does their investigation. As Sara Greenwood pointed out it may be a case of buyer's remorse, or the buyer may have received estimates of the cost to restore the garage to it's original condition that may be more than the buyer anticipated.

I cannot imagine any circumstances where an arbitrator a court would award the buyer's deposit to you because the cancellation came within the 10 day cancellation period.

Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address: charlesbutterfieldbkr@yahoo.com
DRE#00901872
.
0 votes Thank Flag Link Tue Sep 18, 2012
That is a shame that you are not receiving the guidance you need. In this case, since they responded to you before contingencies were removed, they are entitled to receive all their money back.

People change their mind all the time.

As for hiring a real estate attorney, you would pay a lot of money and very possibly lose. This is a no win situation for you.

I recommend that you find a more cooperative, knowledgeable agent and get your home sold.
0 votes Thank Flag Link Tue Sep 18, 2012
Cally As an experienced buyer and seller....and years in this business.
The buyer can cancel for any reason within their contingency period and receive all of their deposit back unless otherwise stated.

Your realtor can not do more than have you sign the release.

It is better to find out your seller does not want your property sooner than later so that you can continue to market your property and receive other offers.
0 votes Thank Flag Link Tue Sep 18, 2012
Sounds like your agent should be in better communication with you about your questions on your contract. Generally California contracts allow for an agreed upon inspection period and loan contingency period, that the buyer is entitled to cancel the agreement within those time frames without any detailed explanation, although out of courtesy the buyers agent usually will inform the seller why they are cancelling. Sounds like your agent needs to get the house back on the market as quickly as possible. You should ask your agent for a copy of the MLS description that went online and make sure that the garage issue was addressed in the description.
0 votes Thank Flag Link Tue Sep 18, 2012
1. You Waived Your Contingencies

In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding financing or an inspection. You might be tempted to do the same if you’re really after a particular property. It will make you a more attractive buyer, but it also comes with serious risks. You guessed it, you might lose your earnest money deposit.

The financing contingency guarantees that you will get your money back if the financing is not approved. With the inspection contingency, you can declare the contract null and void (and get your deposit returned) if there are issues uncovered in the home inspection that make you change your mind about purchasing the home.

If you waive all your contingencies and there are financing or home defect issues, you will not be able to get your deposit back if you abandon the deal. Therefore, you may not want to waive the inspection contingency unless you’re planning on tearing the property down. Or, if you think you will be in a competitive offer situation, you could do an inspection before submitting an offer. That way you know ahead of time if there are any serious issues with the home that would prevent you from purchasing it, and can submit an offer with the home inspection contingency waived. As for the financing contingency, waiving it may be the only way to compete with all-cash buyers. However, you have to be absolutely sure that you’ll be able to get approval from the bank.

2. You Ignored the Timeline Outlined in the Contract

Your contract usually sets specific timeframes in which you need to secure financing and do any inspections. If you try to void the contract after any of these deadlines have passed, you could lose your deposit. Generally speaking, as long as you’ve made a good-faith effort to adhere to the timeline, sellers will grant a reasonable extension if the lender needs more time or there are other extenuating circumstances that delay things. Any extension must be made in writing and signed off by both the seller and the buyer.

3. You Get Cold Feet

If you have a change of heart about the home you’re buying, but there’s no problem with the property or the financing, you likely will not get your deposit back. The earnest money deposit serves as protection for the sellers when they take their home off the market. If late in the game you decide that you no longer want to make the purchase, they get to keep it as compensation for the time and money they have to spend on listing their home again and looking for another buyer.

However, if you do change your mind, you may not be limited to losing the deposit only. The sellers could sue you for specific performance and all the tertiary costs that go with that, including their legal fees. For instance, let's say the sellers moved out of the house and that they staged the home by bringing in additional furniture. When the house goes under contract, they move the furniture out so that they don’t incur further staging costs. If the buyer backs out due to cold feet, think of the additional costs that the seller now bears, which could be more than the cost of the deposit. You could be responsible for these costs as well, so be careful.
Flag Fri Mar 18, 2016
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