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Escrow cancellation considerations

Dear Clients and Friends, 

If and when you consider backing out of a real estate purchase agreement we suggest you consider the points set forth in this memo.

Standard real estate contracts contain inspection and mortgage contingencies that allow buyers a limited amount of time to back out of the contract and receive a refund of their deposit. They also spell out the terms of the deposit and where the money is held in escrow, whether with the buyers’ agent, the title company, an attorney or the developer.

But once all contingencies are satisfied, buyers are locked in and attempts to back out could mean losing earnest money and potentially having to pay brokers’ commissions. That’s because even if the seller lets the buyer off the hook, he or she may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Some brokers will work with the seller in this situation, but not all will.

If a buyer truly does want to back out of a deal, even if he can’t do so under the terms of the contract, he can try to negotiate with the seller for the return of at least part of the deposit. Especially in a hot market, where prices are rising and the homeowner can potentially get a higher price for the home, there might be a chance to come to an agreement.

One thing you can do in advance is to try to make the contract contingent on the mortgage actually being funded by the lender, which then extends the contingency all the way to the closing. You can also try to specify the mortgage rate, for example saying that it can be no more than 5 percent, instead of the prevailing rate.

Some property owners will require large deposits, as high as 35 percent, to try to prevent potential buyers from backing out, but when the deal isn’t right there are still options you may be able to try to avoid buying a property that ultimately isn’t right for you. 

Call us for a free phone evaluation on the above or any other of your real estate legal questions or needs.



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