PMC Mortgage Lender's Blog

"Most homebuyers sign real estate purchase contracts in good faith, but sometimes not even the best of intentions can ensure the deal will close," says Marcie Geffner, veteran real estate and financial writer.

"If the home purchase 'falls out,' buyers might wonder how that will affect their ability to buy another property from a different seller." Geffner says one of their top concerns is the return of the earnest money deposit.

A contract's contingency language will determine if a refund is warranted. For a contingency that requires financing approval, buyers can easily avoid the disappointment of a failed offer by first meeting with a mortgage banker to determine their eligibility for a loan and the amount for which they can qualify.

If there are financing issues, buyers might have to settle for less costly homes or delay their plans. This may mean continuing to rent for some.

Buyers who were tripped up by an inspection report contingency tend to suffer less acute disappointment than those who stumbled over financing, because repairs are specific to the property, while a loan is specific to the buyer.

If a home inspection report reveals the need for repairs and the buyer can't get everything worked out satisfactorily with the seller, and they want to terminate, they can do it and get a full refund.

Geffner cites another contract contingency issue with the example of Phyllis Yanagihara, a certified senior escrow officer. Her buyer wanted to purchase a condominium as a rental property. The buyer made closing the deal contingent on his approval of the homeowner's association documents. When he discovered the association prohibited rentals, the deal was canceled and his deposit was returned.

Left in dispute, however, was several hundred dollars the escrow company had paid the association to get the documents. The buyer balked at the expense, the seller refused to pay it, and in the end, Yanagihara's company absorbed the costs.

Buyers sometimes harbor the misconception that a real estate purchase contract can be entered into lightly and then easily exited due to the contingencies. When a contract is cancelled because of a contingency clause, local real estate practices affect who gets the buyer's deposit.

"In Southern California, an escrow company can't disburse funds without signed instructions from the buyer and seller," explains Yanagihara. In Georgia, one of the real estate brokers usually holds the deposit and makes the call, based on the contract terms. If the broker's judgment is disputed the deposit could get tied up in court and a judge will make the final decision.

Buyers who are determined to purchase a particular house despite the seller's breach of the contract have one other option, which is to sue for "specific performance." Prevailing in such a lawsuit could force the seller to complete the sale.

Keeping your buyers motivated to continue their home search after a failed purchase depends on the buyers' original motivation. Some will jump back into buying a home right away while others may step away from the market.