When the Buyer Backs Out: What Happens to The Real Estate Contract Next?

By | March 14, 2017

Before the real estate bubble impacted the purchase and sale of homes in the United States, there were an average of over 1.2 million homes that transferred ownership every year prior to 2009. When the housing bubble crashed valuation of real estate in all markets, that number reached an historical low of only 306,000 home sales in the year 2009, which represented an over 80 percent decrease in new and resale home transfers.

The real estate market is still recovering while the price of homes continues to increase in most major markets. However, while real estate prices are climbing, household income is falling, placing pressure on the market and the ability for agents and sellers to close real estate contract successfully.  In 2015, there were 501,000 homes sold in the United States – a clear sign that the market has a long way to go before it recovers from the pre-bubble economic era.

In this article, we’ll talk about some of the personal finance and economic impacts that have influenced real estate deals and closure rates. We will also discuss what happens when a buyer is committed by legal contract to purchase and decides to default on the real estate agreement. If you are thinking of buying or selling a home, there are many legal and escrow factors that you should be aware of that can help you avoid costly breach of contract proceedings or missed sales opportunities.

Why the American Real Estate Market is Changing

There are some very important demographic shifts that are going to continue to impact the U.S. real estate market for years to come. One of the first notable (and most discussed) aspects is the retirement of the baby boomer population segment. Why does this senior group matter so much to the real estate industry?  

According to the U.S. Census Bureau, there are 76.4 million American baby boomers (born from 1946 to 1964). This large cohort – which is now between the ages of 51-69 years – will have a profound impact on the real estate market, as they sell their larger family-style homes and seek to downsize affordably (in most cases) for retirement. Many baby boomers will move out from the city or suburbs adjacent to major cities and into areas that have good healthcare providers and a substantially lower cost of living and favorable climate. The migration of retired baby boomers will create a population shift, an employment vacancy in many occupations, and a potential surplus of medium- to large-sized luxury homes.

Because household incomes are continuing to decline in the United States, down payments are more difficult for most families to achieve. Singles and common law partners are preferring to rent, rather than own in many cases, because of damaged credit or other personal finance obstacles – including increased revolving debt and student loans. Because workers are choosing to remain employed past the average age of employment, well-paying medium- to high-salaried jobs are also more difficult to find for young Americans, regardless of the type of education or experience they have.

Other factors that have reduced the affluence and income stability of American residents include the technology bubble and investment crash (1995 to 2001) which reduced income, investment, and demand for housing in some regions, as well as increasing demanding credit restrictions for secured lending from major institutions, including chartered banks. It’s harder today to get approved for a mortgage, down payments are minimal to non-existent, and housing prices in markets where there are robust job opportunities continue to incline rapidly. It is harder to buy a house now than it has been in the past twenty years, and that also increases the number of defaulted real estate purchase contracts as insecure or unqualified buyers back out in breach of purchase and sales agreements.

What Happens When a Buyer Backs Out?  Understanding Escrow

Now that we understand the factors that lead to difficulty for new or resale home buyers, it’s important to understand how contracts can break down when buyers fail to follow through with the legal responsibility of purchasing a home they’ve made an offer on.

In the business of real estate contracts, escrow is the process of allowing a third-party to hold something of value (a deposit) that holds the buyer to the terms of the contract. Bother buyers and sellers can lose when an offer does not go through; buyers can lose their deposit, while sellers can lose other viable offers for the property, which are tabled the instant when a verified buyer enters an escrow contract.

When a buyer has refused to honor the terms of the escrow agreement for a real estate contract, the seller has a number of legal courses of action that can be taken to recoup any financial loss they may have incurred. A real estate offer is legally binding, and there are significant legal consequences for buyers who “back out” on their contractual obligation.

The seller can:

  1. Keep the initial payment or deposit held in escrow by the third party, and terminate the real estate contract and offer.
  2. Sue the purchaser for failing to follow through, and for breach of contract in a court of law.  While this is rare, if the seller can prove that another viable offer was lost pending the sale to the contacted buyer, he or she may be liable for damages and compensation.
  3. The seller can sue for “specific performance,” or legally force the buyer to follow through with the purchase terms of contract, despite their attempt to disengage from the terms and conditions. A court can order a buyer to purchase the home and honor an escrow agreement.

The seller is afforded many ‘remedies’ under law that help limit loss when the buyer fails to meet the terms of the real estate purchase contract and escrow. Buyers should consider whether they are fully committed to seeing through the purchase of the property before they sign the contract, because after signing, American laws are decidedly in the favor of the seller, and have serious and frequently punitive financial consequences.


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