Buying And Selling Homes

Consequences of Breaking a Real Estate Contract



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Real estate contracts are binding legal documents.Every agreement in a real estate contract must be written into the contract or else that agreement is invalid. There is a reason for this. All parties involved with the real estate contract need to understand clearly each phase of their real estate transaction. When you enter into a real estate purchase and sale agreement with another party it is imperative that you understand the various steps needed to be taken for that contract to be fulfilled.

Most people assume that the important phase of a purchase and sale agreement is to agree on a price for the property and a closing date of the pending purchase. While setting the purchase price and the closing date of the transaction set the contract in motion. The most critical element of the purchase and sale agreement is how it is crafted to protect each party during the different phases of the contract.

For example, the first page of a purchase and sale agreement requires a decision about Default of the Contract. The two choices of default are usually a Forfeiture of the Earnest Money or Seller's Election of Remedies. The best choice for a buyer is the Forfeiture of the Earnest Money, because that is a default remedy, which limits the buyers loss to the amount of the earnest money.

If you don't choose the Forfeiture of Earnest Money deposit, the amount the Seller may decide they need to Remedy the Default could be far greater than the Earnest Money Deposit. This is just one reason why it is important to insure that your purchase offer is well crafted to avoid financial pitfalls.

The consequences of breaking a real estate contract can be:

1. Losing a property that you really want.
2. Losing your earnest money deposit.
3. Losing a working relationship with your Realtor.
4. Losing the confidence of other service providers, such as mortgage brokers
and escrow companies.
5. Causing yourself a great deal of grief and the loss of time.
6. Possible legal fees.

The consequences of breaking a real estate contract grows greater during each phase of the real estate contract. The inspection period is the first addendum period, or phase of a contract to work through after the parties have mutually agreed to the terms of the contract. This can be thought of as a discovery phase where the buyer has a set amount of days (usually seven days) to inspect the property and insure that they want to continue with the purchase of the property.

After this period of inspection has been signed off on and agreed to, the buyer is committed to the purchase of the property, as long as they can secure financing. Then the contract is sent to escrow.

When a buyer is negotiating a purchase and sale agreement they should never forfeit their financing addendum because this is the last agreement in the contract that is for the protection of the buyer in case the buyer cannot purchase the property.

To acquire the property of your dreams you may have to forgo a financing addendum, because of competition from other buyers, but be careful to insure that funding for this property is secured before you do this. The consequences are that you will definitely have a financial loss of at least your earnest money if you cannot purchase the property because your funding does not come through.

The financing addendum will protect the buyer once the inspection period is over, but the buyer has responsibilities here as well. The buyer needs to apply for their mortgage within so many days and they must pursue their due diligence to complete the paper work for the loan and then to qualify for the loan.

If the buyers do not fulfill their responsibilities, there can be severe consequences. If the buyer has not done their due diligence to acquire a loan the seller can rescind the agreement and put their property back on the market. The buyer has lost the property and may suffer some financial consequences if the seller feels the buyer has not fulfilled their obligations.

Once the loan has been qualified and funding is certain, the buyer is legally obligated to complete the purchase and sale agreement. If the buyer does not, the consequence are loss of their earnest money, loss of the property they wanted to purchase. They also risk ruining working relationships with the service providers who helped the buyer during the transaction.

Meanwhile if a seller breaks the terms of a real estate contract, they may be legally bound to repay their listing broker for marketing costs and other fees. The seller may be sued by they buyers and other interested parties if the seller is not careful in rescinding the agreement.

An experienced Realtor is trained to help you in this purchase and sale agreement process. I highly recommend you seek the advice of these trained professionals when purchasing your next property.

Real Estate contracts are serious business. Follow them carefully to protect yourself and your real estate investment.

 

More about this author: Charles Grimes

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