What can a home seller do when the buyer backs out of contract?
Attorney Tom Olsen: That they were selling their home. They were scheduled to close on a sale of that home yesterday. At the last minute the buyer backed out, what can they do? The buyer had a $20,000 deposit on the purchase of that home. Boy, I got bad news for these sellers of the properties. There's no real good answers for them.
Attorney Chris Merrill: Are you saying Tom that, again, no good answer because it'll cost the seller that much more money, and it's not worth that? Is that why to pursue it?
Attorney Tom Olsen: If we looked at the contract for sale and purchases, giving the seller two choices, one of two choices, and one of those choices would be to sue the buyer for specific performance, wherein the court would order the buyer to buy the seller's home. Well, that's a months-long process, tons of attorneys fees, and an uncertain outcome, because remember the courts always have the ability to do equity. The courts always have the ability to say, "I don't care what the contract says. I'm going to do what's fair." The court potentially said, "No, I am not going to order that the buyer buy that seller's home."
Where does that leave it? It leaves with the seller pursuing the $20,000 good faith deposit that the buyer put up and bad news on that one too. You know why?
Attorney Chris Merrill: The fact that once it is there, there's no guarantee that they would be able to get that back.
Attorney Tom Olsen: That's the way to look at it because that $20,000 good faith deposit is being held by the title company, the escrow company, and the title company is not going to release that $20,000 without both a written consent of the buyer and the seller. What motivates the buyer to go down and sign a form, saying, "Okay, give my $20,000 to the seller. I guess that's all I can do." Nothing motivates them to do that. Usually, the only way to motivate a buyer to sign a form to release the good faith deposit from the title company, escrow company is to give the buyer a portion of that good faith deposit back.
Often it's going to be the split 50-50. That's the only way to get the buyer to sign off on that deal. This $20,000, good faith deposit now turns out to be a $10,000 damage deposit to the seller, and the seller's left in, "A guy got 10,000 bucks, but now go to find another buyer and time and money."
Attorney Chris Merrill: What happens then if the buyer does not agree and they say, "Hey, title company, I want my 20,000 back."
Attorney Tom Olsen: Well, that's the bad news for the buyer. Is that the title company's not going to release it to the seller. The title company's not going to release it to the buyer until both parties have signed a form authorizing to release that money. If they cannot come to an agreement then-
Attorney Chris Merrill: Then it sits there.
Attorney Tom Olsen: -it sits there until the title company says, "I'm going to go put it in a court escrow and let the judge decide." Now, if you go to the trouble of going to the court, the judge might very well say "Buyer, you were completely in default. You had no good legal, legitimate reason to back out of that contract at the last minute. I'm going to award that 20,000 deposit to the seller together with attorney's fees and court costs." Again, this is-
Attorney Chris Merrill: Months down the road, right?
Attorney Tom Olsen: -months down the road. It's not a great solution for the seller either. That's the bad news. There's really not much of a workaround to that. I suppose that the one way would be to say if you're a-- by the way, they said the purchase price was $1 million, so $20,000 deposit on a million-dollar house is about as low as it should get. I suppose, as a seller, the larger the deposit that you require that the buyer to put up at the moment of closing, the more likely the buyer's going to be to follow through and close this deal.