What happens when a buyer breaches a real estate contract?

Breach of contract in real estate: What does it mean?

In real estate, a breach of contract occurs when a party fails to meet the conditions of a binding contract.

For the buyer, this is typically a matter of failing to complete the purchase on the agreed terms. Understanding what happens when a buyer defaults under a real estate contract can help sellers and buyers to appreciate what happens as a result.

Common reasons for a buyer’s breach of contract

Buyers may default on a real estate contract for a variety of reasons, including:

• Financing issues: The purchaser may not be able to get the required loan or mortgage, therefore making the acquisition impossible.
• Indecision: Occasionally, customers default because of worries, including financial obligations.
• Inspection: Problems detected during the home inspection may lead the buyer to reconsider the purchase.
• Failure to meet contingencies: If contingencies such as the appraisal, financing approval, or the conditions of the home sale are not met, buyers can walk away without facing penalties.
• Personal issues: Life changes, such as job loss, illness, or moving.

Legal consequences for breaching a real estate contract

The seller, who may have missed important time and chances, could find great difficulty if a buyer violates a real estate contract. The seller can explore different legal paths to offset these losses.

1. Forfeiture of Earnest Money

• Earnest money is a deposit that the buyer makes in good faith.
• If the buyer has violated the agreement without a legal justification, generally the seller will be entitled to keep the earnest money as recompense.
• This compensates the seller for his inconvenience, accounting for expenses such as advertising, maintenance fees, and possible market value fluctuations.

2. Specific Performance

• Specific performance is a court remedy through which the court orders the buyer to complete the purchase as per the agreement.
• This is more common when the property is unique (e.g., luxury homes, historic properties, or commercial property) and monetary damages are not enough to compensate the seller.
• Courts will not typically require specific performance except where the property is unique or where the seller can prove considerable loss.

3. Damages

• Definition: The seller may sue for monetary damages resulting from the breach.
  
• Types of Damages:
  
  • Direct Damages: Losses caused by the breach, such as a lower sales price if the property is sold to another buyer.
  • Consequential Damages: Additional costs, such as mortgage payments, taxes, utilities, or maintenance expenses.
    
• Burden of Proof: The seller must prove the financial loss and demonstrate that reasonable efforts were made to mitigate damages.

4. Legal Fees

• The breaching party may be responsible for covering the legal expenses of the non-breaching party.
• Contractual Agreement: Some real estate contracts contain a clause requiring the losing party in a legal dispute to pay the other party’s legal fees.
• Court Discretion: If no such clause exists, the court may decide whether the breaching party should cover these expenses.

Can a seller breach a real estate contract?

While this article focuses on buyers, it’s worth noting that sellers can also breach contracts. For example, they may refuse to transfer ownership, fail to resolve issues related to ownership, or misrepresent its condition.

Buyers have similar options, such as suing for damages or demanding compulsory performance.

Preventing a breach of real estate contract by buyer

To minimize the risk of a buyer backing out on a real estate contract, consider the following:

• Clear contract terms: Make sure all terms and contingencies are clearly outlined in the agreement.
• Protection of earnest money deposit: Demand a large earnest money deposit to serve as a deterrent. The deposit is evidence of the buyer’s sincerity.
• Legal representation: Real estate lawyers can write enforceable contracts to shield both parties.
• Communication: Open communication to resolve disputes before they become major problems. Active problem-solving can avoid minor issues turning into deal breakers.
• Pre-verification: Pre-approval for a mortgage for buyers before entering into a contract to minimize defaults.

Summing-up

Soon to be a complicated and demanding environment is a buyer’s breach of a real estate contract. Understanding your legal rights and getting expert advice is essential to guard your interests. Knowing the possible financial repercussions and how to avoid problems before they start are essential to guarantee a quick and successful real estate transaction whether you are a buyer or a seller.

Lexawise provides expertly created tools and materials to assist you in succeeding with confidence if you are studying for your real estate license exam and wish to expand your understanding of contracts, legal responsibilities, and more.