Publication Date: Wednesday, October
Backing out of a real estate deal can cost big
by Rachel Metz
When Matt and Julie G. began finalizing plans to buy their first
home in Menlo Park in March 2000, they thought everything would
run smoothly from loan negotiations to moving in their furniture.
The seller was asking $1.15 million, and knowing they were competing
with several other bidders Matt and Julie offered to pay $1.6 million
with no contingencies, such as property inspections or appraisals,
on the house.
After putting down a $48,000 deposit, Matt's stock in his Menlo
Park software company went down 75 percent from about $160 a share
to about $40 a share within a three-week period. Victims of a volatile
stock market, the couple suddenly found themselves without enough
equity to cover the costs of purchasing that home and pulled out
of the contract during the last week before the deal would close.
"We couldn't make the large down payment we wanted to make,"
The seller, who Julie said bought the home in the 1970s for $150,000,
refused to give Mark and Julie their deposit money and eventually
the second-highest bidder bought the home for $1.45 million.
"We tried to kind of plead with (the seller) and say, 'We're
a new couple, we're about to get married,' but he was a jerk; he
just said, 'no,'" Julie said. "His point was, 'When you
locked me into this contract in March 2000 things were more on fire
than when I had to put it back on the market.'"
Typically, homebuyers make a deposit of a percentage of the house's
purchase price once the seller accepts their bid. Palo Alto-based
Coldwell Banker real estate agent Vic Spicer said once contingencies
made on the initial contract are met and signed off on, the buyer
is usually required to increase the deposit to 3 percent of the
This deposit, often called "at-risk" money or a "liquidated
damages deposit," serves as a form of insurance for the seller
and in theory, said Atherton-based Loanlane real estate broker Mark
Leaver, most or all of the deposit money would go to them in the
rare event a buyer reneges on a contract. He said a buyer who lands
in a sticky financial situation could ask the seller to renegotiate
the terms of the contract in order to complete the purchase, but
the possibility of a seller agreeing to change contract terms is
Though agreeing to purchase a house and then going back on the
agreement creates a messy situation in which the buyers could lose
their entire deposit, this situation is uncommon, Leaver said. He
estimated less than 1 percent of home real estate contracts in California
end in forfeiture on the part of the buyer.
"If you make a contract to buy a house, you really want that
house and the last thing you want to do is not secure your down
payment," Leaver said.
Spicer estimated up to 5 percent of local potential homebuyers
- including several he has worked with - renege on real estate contracts
for a variety of reasons. He said the contingencies often agreed
upon between buyer and seller can help the buyer if they are suddenly
unable to fulfill the terms of the contract and have not yet signed
off on the contingencies.
"If they've got a really strong reason there's a good chance
the seller is going to cooperate with them, refund their money and
let them go on their way," he said.
If a seller does not want to give the buyer back the deposit Spicer
said the case could become a legal issue wherein a judge would arbitrate
the case and decide if the seller should get some or all of the
Of a seller recouping deposit money, Spicer said, "The court
might require the seller to prove they had a loss. The seller might
have to prove they spent a lot of money advertising the property,
paying for the mortgage. ... It's not cut-and-dried by any means
what's going to happen."
As for real estate agents working with buyers who suddenly pull
out of a home-buying contract, Spicer said they make no commission
on the sale and in extreme situations may take the buyer to court
in efforts to claim some money.
"No two circumstances are ever the same," he said.
To avoid a sudden loss of equity potential homebuyers with assets
tied up in stocks could turn those virtual funds into liquid funds
or secure interest-yielding accounts, such as money market accounts,
after agreeing to purchase a home, Leaver said. That way, the risk
of losing a down payment is quelled and buyers can be sure in two
months they'll be able afford the house they initially decided on.
"Most of the buyers realize that in order to make their transaction
work they have to convert any funds they currently have...into cash
as soon as possible. So most buyers go into the transaction fully
aware of that and they wouldn't play the risk game of leaving their
down-payment money in the stock market once they've signed a real
estate contract because there's too much risk involved," Leaver
Often buyers now require sellers get pre-approved for loans - that
is, get a green light from a bank that says they will back the buyer
with a loan if they decide to apply for one, Leaver said. That way,
the seller can feel more secure the buyer will be able to follow
through on a home deal.
Considering the current economic lows and an ever-changing stock
market, many would-be homebuyers simply drop out of the hunt if
they suddenly don't have the finances to purchase in the area they're
interested in, Leaver said. Economic sluggishness may also be contributing
to an increase in buyer defaults, Spicer said.
"They're deciding to no longer look and that is why you're
seeing houses that are on the market longer now," Leaver said.
After losing their deposit Matt and Julie continued to search and
in May 2000 found a smaller home in Palo Alto.
"I was determined so with our same agent. I found a much more
modest but adorable two-bedroom, two-bath (house) in Palo Alto that
turned out to be a better location for us in the end," Julie