When Homebuyers Walk Away From Closing

Can a Buyer Back Out Before Closing? Yes!

A couple packing up moving boxes outside a home
•••

Big Stock Photo

Walking away from a closing happens more often in buyer's markets than in seller's markets, and it happens more than you might think. Some buyers become frightened when prices are soft, when, in fact, they should be jumping with joy. Many are afraid of further declines in the market and don't feel comfortable because all their friends aren't buying, too.

The fear usually begins to creep in right after the purchase offer is accepted and it builds from there. It's typically a day or two before closing when full-blown panic sets in and buyers might be inclined to pull the plug. And some other factors can come into play as well.

Can they do that? Can a buyer just walk away? Sure, but it can hit them where it hurts—right in the pocket.

Contract Contingencies

Well-written purchase offers almost always include contract contingencies that must be met or removed within certain periods of time. A contingency is a qualifier of sorts. It's like saying, "Yes, I will follow through and buy your home unless..."

Some contingencies are pretty common. Buyers will close if they can secure financing, if they can sell their existing home, if the house appraises at an acceptable value, and if the property passes a home inspection.

A low appraisal can affect financing, so a buyer would be unable to borrow enough to purchase the home through no fault of their own. The home inspection might reveal serious problems with the property. In either case, it's not reasonable to insist that the buyer go through with the purchase.

There are deadlines by which these conditions must be met, and a buyer is absolutely entitled to walk away if one or more are not.

Cold Feet

The contingency stage is when a homebuyer can walk away from closing or cancel the contract, but buyers sometimes don't walk away until the last minute.

The reality of maintaining responsibility for a mortgage payment, interest, property taxes, and maintenance for 15 to 30 years might hit them right away. They might realize at the penultimate moment that maybe they just don't want to tie themselves down like that after all.

Ideally, this will happen early in the process, but sometimes the initial dread doesn't dissipate with time.

Problems With Financing

There might be last-minute problems with financing, cropping up after the contingency period has passed. A lender might issue a loan preapproval letter, but this doesn't mean that it will definitely give the buyer a loan.

Buyers can face underwriting stipulations that they can't perform after the loan contingencies are removed. An experienced loan officer can fix many conditions for loan approval in advance and save the day, but not all loan officers are experienced.

The Buyer Found Something Better

A buyer might keep looking at homes and going to open houses after committing to buying. Another home might turn into their dream home in the blink of an eye. This can mean goodbye to the first "dream home" and hello to the second. 

Life-Changing Circumstances

Unexpected job transfers, sudden pay cuts or demotions, an unplanned divorce, a serious illness, or any number of other circumstances can cause buyers to do an about-face on the brink of closing.

Outside Factors

Sometimes the situation has nothing to do with the buyer's whims or qualifications. The home itself could be destroyed in a tornado, hurricane, earthquake, or flood, or at least it might suffer enough damage to affect the sale. Any number of natural disasters can create havoc and render a home inhabitable.

Most buyers would walk away under these circumstances, and rightly so. But they might also walk if their request for repairs isn't completed or if something else went wrong with the home that they didn't discover until a final walk-through inspection.

The Repercussions of Walking Away

A buyer's earnest money deposit is often at risk after contingencies have been released from the contract.

Some contracts call for liquidated damages in the event of default after this time. Liquidated damages in a real estate transaction usually equal the earnest money deposit for the buyer. The money the seller receives for the buyer's default is often limited to the actual deposit on hand if both parties have contractually agreed to liquidated damages.

All earnest money deposits are negotiable. It's not unusual for a seller to accept $1,000 as a deposit on a $500,000 home, but the higher the deposit, the more money the buyer has at risk under the provisions for liquidated damages.

Buyers who want to walk away will often forfeit their deposit. A thousand dollars might not be substantial enough to force the buyer to follow through and close.

Without liquidated damages, a seller might be free to sue for actual damages, which could exceed the deposit.

Buyer Beware 

Please consult with a real estate lawyer if you find yourself in a position where you want to walk away from a real estate purchase at the 11th hour. The information contained here is not intended as legal advice and should not be relied upon as legal advice. 

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.