Real Estate Matters: Contracts Matter
When REALTORS(R) take their licensing and other classes, we’re taught a thing or two about contracts… and the most important thing we’re taught is that they are serious.
A buyer makes a promise to buy, and a seller makes a promise to sell…. that is, in it’s most basic form, what a real estate contract is.
At the time that the reciprocal promise is made (and assuming the contract is prepared properly), “equitable title” transfers and the promise becomes legally enforceable. This means the sellers can’t sell to anyone else, or change their minds; and the buyers can’t change their minds either… or else.
‘Or else’ What?
Unless there is a “contingency” in the contract, (aka an “if” in the promise), ‘OR ELSE’ means…. well, it probably ain’t good. We call this situation “default”, and we encourage you to call your attorney if this happens, regardless of what side you’re on.
While no two cases are alike, here are some possible consequences, which include “Liquidated Damages“ and/or “Specific Performance“.
Sometimes a contract will specify what the consequences are… usually “Liquidate Damages” so there’s nothing to fight about. I am negotiating a contract like that right now. In that contract, there is a deposit of about 5% of the purchase price. The proposed language says if the buyer defaults, the seller gets the deposit. The end.
When a contract does not have this built in language, then the parties have to come to an agreement… or a judge will do it for them.
If a buyer defaults, the seller will have to sell the property again. If they can resell it, any financial losses as a result of having to “resell” it are potentially liabilities for the non-performing buyer . These liabilities include (but are not limited to) carrying costs, lost profit, repairs made to the property in anticipation of the property being sold, plus attorneys fees and any commissions for which the seller is liable. If the sellers can not sell the property to someone else, they can choose to sue for specific performance.
Specific performance means taking someone to court to make them fulfill their promise (ie to buy the property as promised, or to sell it, as promised).
I had a client once say, “… unless I die…” in response to this explanation. But that’s not really true. Did you know that contracts are binding on you AND your heirs?
I had clients (husband and wife) once that had entered into a contract with a builder, leaving a $30,000 deposit. Before they could close, the husband died! This was, of course, a terrible tragedy. It also changed the wife’s desire (and practical ability) to move to the house they had intended to purchase. Since she could not drive, she needed to live closer to her (adult) son. The builder contract specified the deposit was to be considered “liquidated damages” in the event of a default. This financial loss really added insult to injury, especially in this case since the builder had not experienced much, if any, actual loss at that point (the house had not been started). I am pleased to report that I was finally able to help her get the $30,000 back…. but it wasn’t easy, and the contract and the law backed up the builder’s position.
So the bottom line here folks is, Contracts Matter. Before you sign on the dotted line, make sure you are committed to seeing the deal through to closing.