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What if it Doesn't Close?

Posted June 27th, 2015 under pitfalls, smart buying, smart selling.

Most real estate deals close smoothly, but every now and then, a deal doesn’t close. If it happens to you, what should you do next? Every situation is different, but depending on why the deal didn’t close, there are some basic ground rules about what can happen next.

Problems With Financing

Most of the time, when a deal doesn’t close it’s because the buyer wasn’t able to secure adequate financing. In this situation, the seller must decide whether to extend the closing date, giving the buyer more time to secure financing, or allow the deal to not close.

Extending the Closing Date

If the seller extends the closing date and the buyer is able to secure financing, the deal will close. It can take days or even weeks for a buyer to secure alternate financing, but in many cases, this is the best option for both parties. (A late closing is less of a hassle than the alternatives.)

Allowing the Deal to Fall Through

If the seller does not extend the closing date, what happens next depends on the terms of the agreement.

If the deal is not “conditional on financing”, or if that condition was waived, then unless the buyer and seller come to an agreement on who gets the deposit, the buyer will have to apply to the courts to attempt to get the deposit back.

If the deal is conditional on financing, and the buyer gave a notice of fulfillment, then the buyer is at fault and the seller will likely be able to keep the deposit. If the seller sues for damages, the lawsuit would likely succeed.

Either way, once the deal fails to close, the seller can put the home back on the market, in which case they may owe commission to the listing Brokerage (see below).

Other Problems

Aside from financing, there are other less-common problems that can prevent a deal from closing.

For example, there may be a problem with the title, or an unfinished work order, or a dispute over defects in the property, or a tenant who is failing to move out.

In most of these cases, it is the seller who is considered to be at fault. The seller will owe commission to the listing Brokerage as if the deal had closed.

In addition, the buyer can demand “specific performance”, which forces the seller to fulfill the agreement and sell the home. This is usually accompanied by a reduction (abatement) in the price to compensate the buyer for any losses, such as travel, accommodations, storage of their belongings, and being unable to access the house.

Re-Selling The Home: Commission Owed?

If a deal falls through and the seller is not at fault, several factors determine whether the seller will owe commission to the listing brokerage.

If the seller chooses to remain in the home and doesn’t put it back on the market, no commission will be owed.

If the seller re-lists with the same brokerage and sells the home, the agreed commission would be owed.

If the seller decides to switch to a new listing brokerage or sell privately, things get a bit more complicated. Most listing agreements have what’s called a “holdover clause”, which typically lasts 90 or 120 days after the listing agreement is terminated.

If a potential buyer expresses interest in the property while it’s listed through a brokerage, and you end up selling to that buyer after the listing agreement is terminated, but before the end of the holdover period, you will usually owe some or all commission to the brokerage.

Summary

Whether you’re the buyer or the seller, you should always try to meet the terms of a purchase agreement. If the other side messes up, it’s often better to be flexible, even if you’re not at fault, because of the hassle involved in restarting the entire process.

And of course, if you are at fault, trying to walk away can end up being very costly.

Want to know more, or need advice for a specific situation? Just ask me, I'll be happy to help.