What Happens When A Real Estate Deal Falls Through?

Whether you're the buyer or the seller, when a real estate deal falls through at the last minute it is stressful and can feel chaotic. 

In this episode, Attorney Kate Cerrone shares what to know and do ahead of time to be prepared in case this unlikely but impactful scenario happens to you. 

Attorney Kate Cerrone is a real estate and business law attorney practicing in Connecticut. Learn more at KateCeroneLaw.com. 

Transcript

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Welcome to Work Life Law with Attorney Kate Ciarone. Today's topic is one that's likely high on the mind of every person who's about to sell or buy real estate. What happens if the deal falls through before closing? Kate, I'm sure this is one of the biggest concerns for any real estate deal. So let's start off with the basics. What does it actually mean for a deal to fall through in terms of the purchase contract? So you may hear of stories that people say that they had a deal that fell through before closing, and it's important to remember the process of buying real estate is that you have viewed the property, you have entered into contract negotiations, you've agreed upon a price and amount for a deposit, but the deal is not final until closing. So not until money changes hands and the deed is signed over to the purchaser. There are things that can happen that cause the deal to fall through. Okay, makes sense. What are some of the most common reasons that would cause a real estate deal to fall through, and what happens when it does? So some of the reasons for a deal falling through may be financing issues, there may be issues with the title to the property, or there may just be either the buyer or the seller who changes their mind or refuses to perform the contract. Your contract is a roadmap for the transaction, even when things start to look like they might be falling apart. So, for example, if the financing is becoming an issue for the buyer, there is a financing contingency that is either already in the contract or could be placed into the contract by agreement of the parties, which gives the buyer a little more time to get the right financing so that they can purchase the property. Now, the seller doesn't want to tie up their property with a buyer who ends up not being able to get financing. So usually the buyer is given enough time to secure their loan. However, if days and days or weeks and weeks are going by and there's no approval, there should be an exit strategy for the seller. So that they can move on to a buyer who can purchase the property. So there will be a deadline built into the contract. Is there any way to form the contract in a way that could better protect you as a buyer? there are a lot of ways that your contract can protect you So if the buyer has an inspection contingency in the contract, so that means you may have 15 days to hire an inspector to go in and look at the structure of the house. So if your inspector goes in and tells you that this— there's a serious problem with something structurally, you should have the ability to cancel that contract and receive your deposit back. So those are the kind of ways that your deal may fall apart prior to closing. However, it's also your contract protecting you because you were given enough time to inspect the property. or there may be a title issue. So normally what will happen is the, the closing file will be set up by the attorney. The attorney will either conduct a title search themselves or hire a title company to conduct the title search, and the title search is going to show if there are any title problems with the property. So a buyer is going to want to know that because you don't want to buy a property that has a title issue for two reasons. One is that you will not be able to get title insurance on that property. So when you purchase a house, normally at the closing you buy title insurance, which protects you should there be any title issues in the future so that you can have a house with good title that can be sold. So if there is an issue with the title that the seller cannot clear up, maybe the, maybe the seller did not purchase title insurance and there is a major problem with the title, then you should be able to walk away from that transaction because you don't want to purchase the property without title insurance yourself, and then you're going to have trouble reselling in the future. So during the process of setting up the file, Your attorney will conduct the title search. I normally do my own title searches, and then I can alert my client who's about to purchase the property as to whether the title is clear or not. So if there's a lien that needs to be cleared up, or if there is a probate that never occurred, then that's something that we would have to clear up before the purchase. Right. Okay, so now that we understand the importance of the contract, what would you advise listeners to do once the contract is signed? Are there still things they should be vigilant about? So the important things to remember, as I stated at the beginning, are that you're not closed until you're sitting at the closing table and everything has been signed and the money has changed hands. So pay close attention to the issues as they arise. things. So if you have examined the property, you're seeing a structural problem, or the buyer's attorney is alerting the seller as to a possible title problem, it's important to pay attention to those issues. And part of paying attention is to communicate with each other. So if there's a title issue, for example, that can be cleared up, but it's going to take maybe a week or 10 days, then it's important for the seller's counsel to talk to the buyer's counsel to work out a time frame and to amend the contract. so that the parties are still following the contract, everyone's protected, the deal is protected, they can close as expected, but the time is given that's needed to clear up the issues. So communicating is, is very important. you don't want to ignore a problem. So the mistake that could possibly be made is to think Well, I'm already under contract. I'm sure it will all be fine. So I'm not going to really worry about the issues that I'm seeing. That would be a big problem. Another big problem would be to not mention it until you're sitting at the closing table. That's another problem because your contract contingencies have probably expired. So if you are a buyer and you have inspected a property, you know that there's an issue yet you fail to alert the other side, you will be obligated to close on this property because your contingency time for bringing up the issue, for raising the issue and having the seller resolve it, has passed. So it's very important to keep in close communication with all of your experts that are helping you close. So if you have a real estate agent, It's important to, to keep in communication with them, with your attorney, and make sure that everything goes smoothly. So, what happens if you as the buyer can't fulfill the terms of the contract? What then? you may have heard the phrase that a closing fell through because someone was in default. So what that means is that the contract terms have been breached. So if you are a buyer and you cannot receive your financing commitment letter from your lender in the time that's been allotted to you, then you are in default of the contract. So then the seller has some options. They will likely keep your deposit and then try to find another buyer. Very often I find that in the, in the residential real estate market, people tend to be rather kind to each other in these these situations. So even if you have ignored your contingency time, you haven't alerted the seller that you are not able to purchase because you are not able to achieve the financing, you are in default of the contract. Very often the seller will give you your deposit back and just try to move on to the next deal. However, you have to keep in mind that when you're in default that seller has the right to keep your deposit because you haven't followed the contract and you're in breach. So you want to have an attorney that is working diligently on your file, that's reminding you of these deadlines and contingencies, keeping in close contact with what's happening. Your real estate agent can help with that as well, and make sure that you stay within the contract because if you end up not being able to close, we certainly want you to get your deposit back with no questions asked. If you are in a commercial deal, you would certainly lose your deposit because you have breached the contract. So very important to keep that in mind. The other thing that I run into when I'm dealing with residential real estate closings is that sellers don't realize the gravity of being under a contract. So sometimes, occasionally, I have had sellers that say to me that they change their mind, that either there's another buyer that they would like to engage for the closing, or they just don't want to sell the property anymore. And when you're under contract and you've signed a contract, you are obligated to sell that property. Now, if that is why we build in the contingencies, so if, if you're not obligated to sell, if your buyer comes to you and says, okay, you gave me 30 days to get a mortgage, I have not been approved, we want you to be able to get out of that contract. But if you don't have a reason that has been written into the contract as a contingency and you simply decide that you're not going to sell the property to this other person who's under contract, you will be in default the buyer will get their deposit back and you could be sued for what's called specific performance. Okay, and what does specific performance mean exactly? Specific performance means that someone has been damaged because of your breach of contract. So this person has been tied up in this contract. They have made plans. They have not looked at other properties. You have caused them an inconvenience, and instead of suing you for monetary damages, they could sue you to enforce the contract, and we call that specific performance. So you have contracted to sell this property to a certain person. That certain person could sue you and actually force the sale. So it's very serious to go under contract, and you should only do it if you intend to follow through with the closing. let's say you're coming up on the closing date and something comes up. Is there anything you can do at that late stage of the game to prevent the deal from falling through? the first line of defense in preventing a closing from falling through is communication. So if the real estate agent becomes aware of an issue in inspection, then that real estate agent can make sure that, that he or she communicates the problem with the other real estate agent, with the attorneys involved, and with the parties. And very often there may be either a compromise or willingness to work together to try to get the issue resolved. So there are ways to communicate and to problem-solve so that your end result isn't just a standoff between the parties and a refusal to close. So communication is very important. It's also important to be aware of the terms of your contract. This is something that you have signed. Very often these days they're signed remotely. You will get an email, there will be a signature block, you have now signed usually a 6 or 7 page contract. It's very easy to just then go ahead and assume your closing is going to be fine and you really haven't read the terms of the contract. That does happen. Now you are represented by an attorney who should know your contract inside out. And so, and in turn, should be making sure that you're aware of things like things that you need to do by a certain date. Be aware of your deadlines. You don't want to inadvertently miss a deadline. So this can come up in real estate because sometimes the market is moving very quickly. So a seller has you as the buyer under contract. They're looking around, they're realizing prices are going up. You know what, if I get rid of this buyer, I'm probably gonna have a better buyer right around the corner. So as soon as you miss your deadline, I'm going to tell you that I want out of the contract. So you don't want that to happen. Your real estate agent will be very much aware of the market we're in, whether it's a buyer's market or a seller's market. Your attorney will be aware of that also. They will let you know let you know what's trending, what they're seeing, whether people are able to slow down to work problems out, or whether there's kind of this eagerness to have closings fall through because of rising prices in the market. So there's a lot to it. The important thing is to be aware of what you've agreed to, perhaps request more time when needed, make sure you're staying within your contract requirements, and then you can go forward with the

Alright, and last question for today: 13:50

What's your final advice to listeners on how they can prevent their real estate deal from falling through? So to wrap things up, how to avoid a closing from falling through. So first of all, remember, even if something is going wrong, there is a process. Your contract is protecting you. There are defined options in that contract. So you want to make sure that you are communicating well with your real estate attorney and your real estate agent, if you have one, and you're not stuck. So your representatives are there to help you. So the contract and the legal framework is providing structure for you so that you can navigate through the different issues. So you're not alone, but you need to understand what's required and then take your each step intentionally. Don't panic, don't make reactive decisions, and you will have people communicating for you. So, for example, your real— real estate agent can communicate with the real estate agent on the other side often to work things out. So especially when there are emotions are running high, you only need to be aware of the issue and let your professionals who you have hired to do the work to help you. So both your real estate attorney and your real estate agent should be experienced and understand how to navigate through to get you through to a smooth closing. Thanks for listening to Work Life Law. If you'd like to work with Attorney Sarone, you can reach her at 860-928-2429 or katesaronelaw.com. You can also follow her on YouTube, Facebook, Instagram, and LinkedIn.