Scenario #1

A new listing was advertised and had multiple offers. The seller was excited to move and accepted a strong offer with $2500 in Earnest Money. Over the weekend the Seller informed their parents and siblings that they were moving. In those discussions the parents talked the Seller out of selling the home. The Seller called the listing agent and asked to cancel the contract. The agent explained to the Seller that they couldn’t cancel the contract and that if they didn’t sell they would be in default of the contract. The agent referenced section 16.2 of the REPC which states “If Seller defaults, Buyer may elect one of the following remedies: (a) cancel the REPC, and in addition to the return of the Earnest Money Deposit, Buyer may elect to accept from Seller, as liquidated damages, a sum equal to the Earnest Money Deposit.”

The Seller claimed they didn’t understand why they would have to pay money to cancel the contract and keep their home. The agent explained that earnest money protects both the buyer and seller in a transaction. The Seller asked if the Buyer would take less earnest money as it had only been under contract for four days. The listing agent approached the buyers agent and asked if the Buyer would be ok accepting $1500 instead of the $2500. The buyer agreed to $1500 and the return of their initial earnest money to walk away from the transaction. The contract was terminated with a sellers cancellation document that referenced that once the $1500 was delivered to the brokerage that both the Buyer and Seller agreed this finalized the termination of the contract.

What we learn from this scenario: Make sure your seller understands that once they accept an offer they can not cancel. They can only default.

Scenario #2

Seller was going to relocate out of state but the new job ended up being retracted. The Seller did not want to add the stress of moving on top of looking for another new job. The Seller reached out to the listing agent and informed them that they were no longer wanting to move and were choosing to default. The earnest money on this home was $5000. The listing agent informed the Seller that she would be in default of two contracts: The REPC and the Exclusive Right to Sell Agreement.

Seller contacted me directly to see how she could get out of the contracts. I discussed with her on what her options could be and explained that the REPC is a contract between the Buyer and Seller, whereas, the Exclusive Right to Sell Agreement was a contract between the brokerage and her. I probed to see if there were scenarios in which she would still want to sell. She informed me that if she got a job out of state that she would still sell but didn’t want all the stress of inspections, appraisals, etc until she knew if she could get the job.

I talked with the Buyers broker and gave them the situation. She needed 12 days to figure things out. Either she was choosing to default or she may still end up selling. I urged them to be patient as I thought we could still find a way for things to work out. Sure enough on the ninth day she contacted me and still wanted to sell but needed the proceeds from her home before she could move out. I recommended the buyer and seller close on time and do a short-term lease back. This was a win-win as the buyer was able to keep the lock on the home and the seller was able to get the equity from her home so she could get an apartment where her new job was located.

What we learn from this scenario: Be patient with your client and look for ways to help them. If they choose to default don’t burn bridges. What would’ve happened if the listing agent cared more about the commission than their fiduciary to the client? In my opinion, the transaction wouldn’t have closed as the Seller would lost confidence that the agent truly was her fiduciary.

Scenario #3

The Buyer and Seller agree to some repairs to be done by a certain date. These repairs were negotiated on a regular blank addendum and not on the recommended “Resolution of Due Diligence Addendum.” The deadline to do the repairs was February 19th and Settlement was February 23rd. The evening of the 19th the Buyer’s Agent went to the property and noticed not all of the repairs had been done. On the morning of the 23rd the Buyer cancelled the contract claiming the seller was in default because the repairs were not done on time and requested the earnest money back.

This scenario is a tricky situation as both sides are claiming the other is in default. The Seller is claiming all the repairs were complete by the 19th and the Buyer is claiming they were not complete. So who’s right? If the repairs were not complete and could be proven that they weren’t complete then the seller would be in default and the buyer could cancel the REPC and get the Earnest Money back. If the repairs were complete by the repair deadline then the Earnest Money would go back to the Seller. Unfortunately this one still has not been played out as neither side has proof to back up their side of the story. I share this scenario because it shows the importance of knowing how your client can default.

The Buyer can default in the following ways:

1. Not turn earnest money in on time.
2. Not turn earnest money in to the proper location mentioned in the contract.
3. Not closing on the home nor cancelling prior to the settlement deadline.
4. Failing to follow all the instructions in the contract. For instance, if the buyer is to do a loan application with a certain lender by a certain date, this must be done or the buyer is in default of the contract.

The Seller can default in the following ways:

1. Not providing ALL the seller disclosures mentioned in section 7 of the REPC prior to the Seller Disclosure Deadline.
2. Refusing to close on the home after accepting a contract.
3. Refusing to meet agreed upon deadlines such as having the repairs complete by a certain date.

What we learn from this scenario: make sure everything is written and clearly stated in an addendum and use the Resolution of Due Diligence Addendum when agreeing to repairs.

Scenario #4

Buyer cancels the contract on the Settlement Deadline prior to 5:00 PM. The Seller informs the listing agent that they are going to sue the buyer for significantly more than just the $5000 Earnest Money as they are in default of the contract.

There is a big difference between cancellation and default.

In this scenario we use paragraph 8.2(b)(ii) of the REPC which states: “If after expiration of the Financing & Appraisal Deadline referenced in Section 24(c), Buyer fails to obtain the Loan, meaning that the proceeds of the Loan have not been delivered by the Lender to the escrow/closing office as required under Section 3.2, then Buyer shall not be obligated to purchase the Property and Buyer or Seller may cancel the REPC by providing written notice to the other party.” It then goes on to say in 8.3(b)(iii) of the REPC: “If the REPC is cancelled as provide in Section 8.3(b)(ii), Buyer agrees that all of Buyer’s Earnest Money Deposit, shall be released to Seller without the requirement of further written authorization from Buyer. Seller agrees to accept, as Seller’s exclusive remedy, the Earnest Money Deposit. as liquidated damages. Buyer and Seller agree that liquidated damages would be difficult and impractical to calculate, and the Earnest Money Deposit is a fair and reasonable estimate of Seller’s damages in the event Buyer fails to obtain the Loan.

The Seller didn’t want only $5000. The Seller felt like because the Buyer could’ve still been able to get a loan they should’ve been able to sue for additional damages. The above paragraph shows exactly what happens and in this case the $5000 would be what is due to the Seller for the buyer’s cancellation after all deadlines except for the settlement deadline. So let me ask you, if Buyer had notified the Seller at 5:30 PM that they weren’t closing would this scenario have changed? Yes! If the buyer cancels before the Settlement deadline it is a CANCELLATION. If the buyer cancels after all the deadlines then they are in DEFAULT. Section 16.1 talks about what happens if the Buyer is in default. Section 8 talks about what happens if the Buyer cancels.

What we learn from this scenario: It is important for the Buyer and Seller to understand how earnest money works and protects them.

Buyers: If I represent a Buyer I ask them: “If the Seller got cold feet and wanted to pay you to walk away from this home how much would you expect from them?” If they tell me $5000 I’m going to explain earnest money and how it protects both sides and recommend they do $5000 in Earnest Money.

Sellers: If I represent the Seller I’m going to ask them “If you’ve moved out of the property and on the morning that we would be signing the closing documents the Buyer notifies that they will no longer be closing on the home how much would you expect? Whatever amount they give me is what I suggest to ask for earnest money. For all of my Seller’s I utilize section 8.3(b)(i) which states some of the earnest money in non-refundable after the due diligence deadline, unless the home doesn’t appraise. I typically give the Buyer 10-17 days to get their Due Diligence complete at which point I typically like to see 40%-80% of the earnest money in this section. I don’t ask for all of it because if the Buyer is going to cancel after the due diligence deadline I’d like them to do it sooner than later and having some money that could still go back to the Buyer is one way of doing that.