Buyer Backing Out 5 Days After Earnest Clears - Any Loopholes?
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Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8yIf they have 7 days to back out for any or no reason, which is typical, they have right to back out, period. Why do you think you should be able to keep the EM?
22 Replies
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes8yIf they have 7 days to back out for any or no reason, which is typical, they have right to back out, period. Why do you think you should be able to keep the EM?
Thanks Wayne. I don't think anything. Just exploring the options as I'm new and this is my first time dealing with this scenario.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Wayne Brooks:
If they have 7 days to back out for any or no reason, which is typical, they have right to back out, period. Why do you think you should be able to keep the EM?
read the contract should be plain English.. also good experience for when your representing a buyer that wants to back out during their free look.. does not matter if EM cleared or not that irrelevant to the time lines.. other than in some contracts EM has to be in and in good money in a certain amount of days other wise contract is voidable.
- Rowlett, TX · Member since 2018 · 19 posts · 6 votes8y
No loopholes. Sometimes buyers are putting down offers on multiple houses to be the first to see the property. My Realtor always reviews the buyers with me so we pick a strong contender... especially if multiple offers are offered. Sounds like yours would have been a multiple offer deal.... It sucks when someone backs out but it happens. Make sure to vet them well and pick someone likely to go the distance - even if its not the highest offer. If it sold that fast the first time then it should sell quickly again. Good luck!
@Mark Robinson Thanks, Mark. Would you be willing to share any tips on picking out offers that will go the distance? This one was 20% down conventional. What else do you look at?
- Rowlett, TX · Member since 2018 · 19 posts · 6 votes8y
Of course Art..... we look at everything.... not just the money... who is the buyer? are they married? Have kids? Where to they work? What do they do for a living? Why are they buying? Relocating, upgrading, downsizing... How long did they stay in the house looking around? Where do they currently live.... I will tell you a secret... I ask all kinds of questions when there is time... one of them came up in a deal a month ago and we had multiple offers and it just so happened I knew one of the folks looking at my house. He did not know it was my house because it had been a rental for.... well.... 27 years. His offer was lower than the rest but I knew him and wanted to discuss it with him. We had like 10 offers and I knew he was recently divorced, had custody of his 2 kids, and had a great job at the city... he goes to my church.
He told me my realtor has had me put in offers on 4 or 5 houses I like to see what shakes out. I said what? He said the most I can loose is the $100 due to the due diligence time. I was boiling and then I thought... his realtor is right. So I ask - how does my house stack up? He said well its number 3 on my list of what I want.... I said then you want mind me going with another offer. He said no, I have one picked out I like better for $15k less. Good luck, good luck.
If I did not ask about the folks and the jobs and the kids - I would not know. Does not cost you anything to have your realtor ask. Remember they want you to sell your property and they want it to go the distance too. Oh... you can also have the realtor ask - how is there credit? there job? is this contingent on the sale of another property..... you can also ask for non-refundable deposit with an accepted offer. Most of the time its $100 where I am from _ Rowlett, Texas. But we asked for a $500 on this deal. we had 3 of the folks agree and chose from them. It worked out. Good luck Art.
Did they pay an option fee? In Texas the standard contract has earnest money which is generally 1% and an option fee which is paid for the 7(or 5 or 3 or however long) day inspection period. The option fee is usually much less ~$100-$500 but the seller keeps it whether the buyer buys or walks away. That way the seller at least gets something for the time it is off the market and the buyer has time for inspections and due diligence. Seller would only keep the earnest money if the inspection period expired and then they walked. Talk to your agent and see if you can do that in Illinois.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Peter M.:
Did they pay an option fee? In Texas the standard contract has earnest money which is generally 1% and an option fee which is paid for the 7(or 5 or 3 or however long) day inspection period. The option fee is usually much less ~$100-$500 but the seller keeps it whether the buyer buys or walks away. That way the seller at least gets something for the time it is off the market and the buyer has time for inspections and due diligence. Seller would only keep the earnest money if the inspection period expired and then they walked. Talk to your agent and see if you can do that in Illinois.
never seen that in any state but Texas.. where that is part of the contract and standard operating procedure..
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes8y
Originally posted by @Art M.:
I listed a house and it sold in 10 hours for $15K above asking. The buyer is now backing out 5 days after $5K earnest money cleared. It's my understanding they have 7 days to back out for any reason and get earnest money back. Are there any workarounds here to keep earnest money or is there nothing I can do? This is my first listing, so thanks for answering my newbie question!
That is a good reason to continue showing the house and taking backup offers, even when you go under contract.
@Jay Hinrichs I believe Texas did it to address this exact type of situation even though it still happens just as @Mark Robinson says. I'm surprised it isn't common practice in more places. The problem I have with it is that it hurts first time home buyers more than checks investors. A serious investor wouldn't blink at $100 but a family buying their first house in this type of market will be told by their own agent "to appear competitive you will need to offer over asking, provide at least 1% earnest money, and pay a decent option fee with a short inspection period etc" If that isn't bad enough, this family will pay for an inspection only to discover the house is a lemon and be out nearly $500 and back to square 1. That $500 is a lot when it comes to first time buying and it is why so many people are discouraged by the buying process. I know this first hand because when my fiance went to buy a house this happened. She was pretty bummed about the $350 inspection and the $100 lost to walk away from a house that the inspector found had a slab leak. Even though she logically understood that $450 was better than buying a house with foundation and water problems, the emotional part of her was upset because she had spent years saving for the downpayment and now she just "wasted" 3% of that fund.
When I took the real estate agent classes I vividly remember a story told by one of the teachers. He was a residential agent in Dallas and had a listing for a lot in a VERY nice part of Dallas called Highland Park (I think he said the lot was listed for 650k!) Anyway there were 3 lots all about the same size and priced all about the same. Well, his went under contract so he was rightly excited and went out to celebrate. He ran into one of the other listing agents for one of the other plots because they were both celebrating. After a little back and forth there was a "I'll show you mine if you show me yours" type of agreement and they were both surprised to realize the same builder had contracts on both. Next day he called the 3rd agent and sure enough same builder on all 3. The builder had put 20k down in earnest money on each offer but only offered $500 as the option fee. The buyers of each saw the 20k deposit and thought JACKPOT! a serious buyer and accepted. The builder had effectively locked up 1.8 million in real estate for $1500. Once the home owner picked the lot he liked best, the builder walked away from the other 2 deals and got his earnest money back. My teacher said he called the builder up and basically told him touche, but next time lets make the earnest money $500 and the option fee 20k (obviously a joke because nobody would ever do that). Now was this a true story or just a way to get students to remember a bit about contracts? I really don't know but I for sure remember how this part of the TREC contract works. And at least the builder had to pay something because it seems that in other states this same thing could happen and its free.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Peter M.:
@Jay Hinrichs I believe Texas did it to address this exact type of situation even though it still happens just as @Mark Robinson says. I'm surprised it isn't common practice in more places. The problem I have with it is that it hurts first time home buyers more than checks investors. A serious investor wouldn't blink at $100 but a family buying their first house in this type of market will be told by their own agent "to appear competitive you will need to offer over asking, provide at least 1% earnest money, and pay a decent option fee with a short inspection period etc" If that isn't bad enough, this family will pay for an inspection only to discover the house is a lemon and be out nearly $500 and back to square 1. That $500 is a lot when it comes to first time buying and it is why so many people are discouraged by the buying process. I know this first hand because when my fiance went to buy a house this happened. She was pretty bummed about the $350 inspection and the $100 lost to walk away from a house that the inspector found had a slab leak. Even though she logically understood that $450 was better than buying a house with foundation and water problems, the emotional part of her was upset because she had spent years saving for the downpayment and now she just "wasted" 3% of that fund.
When I took the real estate agent classes I vividly remember a story told by one of the teachers. He was a residential agent in Dallas and had a listing for a lot in a VERY nice part of Dallas called Highland Park (I think he said the lot was listed for 650k!) Anyway there were 3 lots all about the same size and priced all about the same. Well, his went under contract so he was rightly excited and went out to celebrate. He ran into one of the other listing agents for one of the other plots because they were both celebrating. After a little back and forth there was a "I'll show you mine if you show me yours" type of agreement and they were both surprised to realize the same builder had contracts on both. Next day he called the 3rd agent and sure enough same builder on all 3. The builder had put 20k down in earnest money on each offer but only offered $500 as the option fee. The buyers of each saw the 20k deposit and thought JACKPOT! a serious buyer and accepted. The builder had effectively locked up 1.8 million in real estate for $1500. Once the home owner picked the lot he liked best, the builder walked away from the other 2 deals and got his earnest money back. My teacher said he called the builder up and basically told him touche, but next time lets make the earnest money $500 and the option fee 20k (obviously a joke because nobody would ever do that). Now was this a true story or just a way to get students to remember a bit about contracts? I really don't know but I for sure remember how this part of the TREC contract works. And at least the builder had to pay something because it seems that in other states this same thing could happen and its free.
that's just part of real estate in all other states I work in and that is about 14 you get a 5 to 14 day free look.. depending on what you negotiate and of course subject to clear title.. and in our state of Oregon if the seller does not give you a sellers disclosure you can back out the day of closing and by law he cannot keep any EM .. and in SF Bay area you better have 20 to 50k of EM up front in a check other wise your wasting your time.. of course you still have due diligence
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes8y
@Art M. In Illinois, our standard is 5 day attorney review, 5 day inspection. The inspection contingency is silly though, because they attorney can kill the deal for any reason, IE "I do not approve of the contract in full". Usually if more time is needed, they atty sends an extension request and its almost always accept.
The EMD is again, a silly gesture from the past, unless its a cash offer and the EMD is substantial - then it becomes more of "proof" that they funds actually exist. And by substantial I'm taking $75k+ on a sub-200k property.
End result is yes, they can cancel and get the EMD back. This is somewhat typical in our hot market - throw a HUGE offer over list, then actually take the time to look at it. Jump on the phone with other offerers (hopefully you left it active long enough to get multiple offers) and try to get someone else lined up. If it went contingent in the MLS and then reactivates, many folks will look at that like the buyer must have found something wrong, and your property all of the sudden isn't so hot. In the future with a hot property, get multiple offers and make sure that everyone has physically viewed the property. Additionally speak with the buyer's agent and understand the buyer's motivation and at what point they are in the buying process.
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
@Art M. - it depends on the reason and contingencies. USE A REALTOR if you don't know what you are doing. It will cost you thousands not to
Second City Real Estate4.821 Reviews - Real Estate Agent · Georgetown, TX · Member since 2016 · 169 posts · 107 votes8y
There are, literally, dozens of ways for buyers to extricate themselves from a contract. Even after the option period is over. Best practice is definitely to continue to take backups. And keep that list of other offers handy so you can start calling to see if they're still interested.
Especially when inventory is low like it is in most of Texas, buyers will put in offers on multiple properties in hopes of one working out. I have gone through two or three buyers on listings multiple times, and represented the second and third choice that ended up buying listings as well.
- Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes8y
1. Always consult with your broker first...no one here has read the terms of your contract.
2. Your contract will always be your guiding document so if you're unsure what what the party's rights and obligations are, again, seek assistance from your broker.
- 8yGeorge SkidisPro MemberRental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
Not an Attorney and I don't play one on TV. This is not legal advice. Get an Attorney.
There is a song with the refrain that "There must be 50 ways to leave your lover" There are more than that when it comes to getting out of a real estate contract.
What you need to do is have a real estate attorney review the contract and determine how much of the earnest money, IF ANY, that you may retain as liquidated or agreed damages. As long as their cancellation is not a breech of the contract you probably owe it all to them unless there is another stipulation you have not disclosed.
@Mark Robinson Thank you for the great advice, Mark. Do you know how the non-refundable $100 is written into the contract? Can anyone speak to whether this is enforceable? Do you just tack $100 onto their earnest money. If they can back out for a week and even longer with a good lawyer, what the hell is the point of earnest money? Doesn't sound very earnest to me.
@Peter M. Think you just answered the question above. Thanks, Peter! Just looked into it and we don't do option fees here. I think we should.
@Eric James For how long can you do that?
@Matthew Olszak Thanks for that, Matthew. EMD is earnest money deposit, I assume?
So I should have seen the offer $15K over asking and $20K EM as a red flag? I spoke with the agent several times and she said the buyer was some big wig at Apple and just wanted to lock down a house and that's why their offer was high. Made sense. Seemed like a win-win. We did have multiple offers. I'm at the open house now and we have 3 offers and final & best due at 8PM. I did a whole new listing instead of reactivating for the very reason you mentioned. I guess spotting this stuff will just come with experience.
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes8y
Originally posted by @Art M.:
@Mark Robinson Thank you for the great advice, Mark. Do you know how the non-refundable $100 is written into the contract? Can anyone speak to whether this is enforceable? Do you just tack $100 onto their earnest money. If they can back out for a week and even longer with a good lawyer, what the hell is the point of earnest money? Doesn't sound very earnest to me.
@Peter M. Think you just answered the question above. Thanks, Peter! Just looked into it and we don't do option fees here. I think we should.
@Eric James For how long can you do that?
@Matthew Olszak Thanks for that, Matthew. EMD is earnest money deposit, I assume?
So I should have seen the offer $15K over asking and $20K EM as a red flag? I spoke with the agent several times and she said the buyer was some big wig at Apple and just wanted to lock down a house and that's why their offer was high. Made sense. Seemed like a win-win. We did have multiple offers. I'm at the open house now and we have 3 offers and final & best due at 8PM. I did a whole new listing instead of reactivating for the very reason you mentioned. I guess spotting this stuff will just come with experience.
Sometimes that's a red flag, sometimes its not. Depends heavily on how their offer is structured and the circumstances. But don't put much weight on the Earnest Money Deposit, as its almost always refundable and a non-refundable deposit is NOT at all common in our market. Biggest thing is to feel out how much the buyer needs your property.
BTW - for the future, the cancel-and-relist approach appears on our hot-sheet, so its easy to see past and is something I point out to my clients. But if you are in a hot enough market/property, relisting or reactivating works just fine as many buyers simply won't care, they just want the opportunity to put in an offer (especially with sub-300k condos).
@Matthew Olszak Thank you, Matthew. If you've got time, would love to hear more about how offers are "structured" and what that means. And how to tell how badly a buyer needs the house and the implications.
@Mark Robinson I checked with a real estate lawyer I know and he said we can't do these in Illinois. Too bad. A few hundred dollars seems more than fair as compensation for derailing such a large transaction with so many parties involved...
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