One of the most important elements of the sales contract is the default clause, yet it is the one buyers and sellers seems know the least about. While defaulting on a real estate contract is extremely rare, it does happen and can expose the parties involved to significant legal and financial risks. So take a moment to educate yourself about this important contract clause.
What is Defaulting on a Real Estate Contract?
Defaulting on a real estate contract occurs when either the seller or the buyer fails to meet the terms of the contract and agreement. Normally, default occurs after all the contingencies have been removed from the contract. Defaulting is not a crime, but you need to have genuine reasons or contingencies in place for the default.
Any contingencies in the sales contract should be clearly spelled out, with deadlines. A seasoned and trusted Realtor will guide you through the contingency process. A contingency allows the buyer or seller (though typically in our market, it is the buyer) to change the terms of the contract, or get out of a contract without penalty. For instance, a radon inspection contingency allows the buyer to test for radon in the home. If radon is present, the buyer can negotiate with the seller for remediation of the radon or a credit to do so. If the seller refuses, the buyer may cancel the contract (if that is how the contingency reads). In this case, the buyer would NOT be in default.
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If any contingency does not pan out (the buyer’s home does not sell, financing falls through, etc), the buyer is NOT in default on the contract.
Once all of a contract’s contingencies have been removed, both parties (seller and the buyer) are legally obligated to proceed to settlement.
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Usually, the sales contract will contain a specific date when settlement must take place (the seller may want to add language in the contract that all time limits contained in the contract are “time is of the essence, “ in other words, if the deadline passes, the buyer will be a default).
However, either party could still be in default. Here is how that can happen:
A buyer would be in default by…
- not putting the initial deposit (good faith deposit) into escrow on time
- cancelling the sale after removing all contingencies or without cause allowed by the contract
- not removing contingencies on time (or possibly ignoring other deadlines)
- not completing loan paperwork on time
- not returning the signed disclosures on time
- not bringing “good funds” to escrow in time for closing
- financing falls through and there was no financing contingency
- not getting insurance
- failure to show up at the settlement with the required documents
A seller would be in default by…
- not providing completed disclosures or reports on time
- not having contractually required work done completed (such as pest work or home inspection repairs)
- not keeping the utilities on for inspections and final walkthrough
- not providing the loan payoff information, or any other required information, in a timely manner to the title company (escrow)
- causing a delay in closing due to not signing off on time
- refusing to schedule or attend a sign off to sign the closing papers
- not moving out on time
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So, what can you do if a party ends up defaulting on a real estate contract?
If You’re a Seller Defaulting on a Real Estate Contract
As the seller, you can keep the buyer’s earnest money. But, that isn’t the limit of the buyer’s liability. You can also sue for specific performance – in other words, force the buyer to settle. This option is rarely used and even more rarely granted. Another option is to sue for monetary damages for breach of contract. For example, if a buyer defaults on a home purchase and the seller can then only sell the home for $50,000 less than the original sales contract, the seller could sue the first buyer for these funds.
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Can a Buyer Default on a Real Estate Contract?
If a seller defaults in any way, you, as the buyer, have similar options. You can sue for monetary damages for breach of contract, termination of the contract and return of the deposit (and possible repayment of expenses), and/or specific performance — in other words, forcing the completion of the sale.
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The Bottom Line on Defaulting on a Real Estate Contract
Can you back out of a real estate contract? This is an easy one — be sure to read every word of the sales contract and any addenda and contingencies and have a complete understanding of all terms and conditions. Of course, an experienced Realtor will successfully guide you every step of the way – from househunting through to a successful settlement process. It’s equally important to have a great lender and title company on your side.
If we can help you buy or sell a home, please reach out today. Please understand though that we are not lawyers and cannot give legal advice. If you are seeking or in need of legal advice, please reach out to a lawyer.
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