When Your Buyer Defaults...
When Buyers Default
Default occurs when the buyer in a real estate transaction does not perform according to the terms stipulated in a purchase and sale agreement.
In most purchase and sale agreements, there is (or should be) a clause that dictates the options a seller has in case of default.
In the event of a Buyer’s Default, a seller has three main options:
Keep the earnest money deposit
Sue buyer for damages
Sue for specific performance
It’s become customary for the seller to keep the earnest deposit in the event the buyer defaults. However, did you know that in Washington state, there is a limit to how much of the earnest money a seller can keep as liquidated damages? You bet. Under our state’s law, no more than 5% of the property sale price can be kept as damages. Keep this in mind if you decide to select this option and know up front what that dollar amount will be. If you notice a buyer offers a significantly higher earnest money deposit, treat it for what it is: a signal of financial strength and a strong intention to make good on the contract that has been signed.
When the seller is entitled to collect the deposit, the money is split amongst the seller, the listing firm, and the selling firm. The seller generally gets to keep half, the listing firm usually receives a quarter (but not more than they would have expected as commission if the default did not occur), and the selling firm gets the remaining quarter. This breakdown is written in a standard listing agreement you would fill out with your broker.
The seller can always choose to sue the buyer if a default occurs. This can be very costly and time-consuming as you can imagine! A typical purchase and sale agreement will have a clause which states that in the event of a lawsuit, the prevailing party’s legal fees must be paid by the other party. This is generally referred to as an “attorney’s fees provision”.
The last option is for the seller to sue the buyer for specific performance. Essentially, the court will force the buyer to perform on the contract they have signed. The buyer will have to go through with the purchase of the real estate they have agreed to buy. This remedy is rarely chosen, because oftentimes, the seller may find it easier to keep the deposit and find another buyer. This option is very situation-specific.
Before you sign a purchase and sale agreement, make sure you understand the options available to you in case your buyer defaults and make these intentions known. Consult a real estate or contracts attorney if you are ever unsure.