How to Protect Yourself from a Buyer Failing to Close Your Sale

Most home sales close successfully. And most REALTORS® and Lawyers will work closely to prevent any 11th hour hitches.

Once in a blue moon, however, a scenario similar to the following crops up.

You’ve decided to move and so listed your home for sale. After a number of showings, you negotiate an accepted offer on the condition that your buyer obtains mortgage financing. Within days the Buyer’s representative gives your agent a document waiving or removing the financing condition from the purchase agreement.

The Agreement on the sale of your home is now firm and, on that basis, you buy another home with a moving date that coincides with your sale. On the day of closing your lawyer informs you that your buyer does not have the necessary funds and is unable to close. As a result both your sale and your purchase collapse, and both agreements are in breach of contract. Though uncommon, such an occurrence can happen. So the question becomes:

How can you protect yourself from the risk of a buyer failing to close?

Though there are no guarantees, a seller can utilize some defensive measures.

  1. A very good approach is to require proof of mortgage financing as an added condition to the purchase agreement. As the seller you want written confirmation from the buyer’s third party lender that the mortgage is in place, without lender conditions, before the agreement becomes firm and binding. It’s not 100% foolproof because the lender will usually perform a last minute credit check on the buyer just to make sure no credit issues have surfaced between approval and closing. Still, it’s an excellent safeguard.
  2. Though not always possible, you can try to negotiate a deposit large enough to cover any estimated damages if the transaction does not close. At least negotiate a deposit that the buyer would think twice about losing. Hint: most mortgage packages require proof of the buyer having 5% down.
  3. You may want to talk to your lender about the feasibility of bridge financing to be able to close on the home you are buying and avoid a potential action for damages from your seller.
  4. Finally, and though after the fact, you may have an action for damages against your buyer. 

Talk to your REALTOR® about such concerns so that negotiations can address defensive measures that protect your interests and prevent.

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Eugene Pilato

Eugene Pilato

Broker of Record
CENTURY 21 Today Realty Ltd., Brokerage*
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