Default in a Home Purchase

The old adage, "See a penny.  Pick it up.  All the day you'll have good luck." no longer holds any weight.  In fact, I've watched as young people have dropped change at a check-out or on St. Paul streets, and they walk away.  It costs more energy to bend down to gather the fallen coins than the money is of value to them.

In like manner when a St. Paul buyer walks away from a completely executed purchase agreement with no contingency clause to give them a legal out, they are walking away from their earnest money.  Failure to continue with the purchase as agreed in the written contract is default.  Default is grounds for the seller to keep the buyer's earnest money. 

Easy ways for a St. Paul buyer to lose their earnest money include:

• Decide not to purchase the St. Paul home after the loan is approved and the inspection period is completed.  Twice recently buyers of my listings have "defaulted" saying they no longer think they can afford the payments.  IF the lender gave them a good faith estimate as they are required to do, the payment is clearly disclosed at loan application.  How can the passage of time change the amount of that payment?  The earnest money becomes the sellers'.
• Get cold feet and chicken out of the purchase.  It's normal for buyers to panic after the offer is finalized.  Until that time, the buyers and sellers are focusing on the inspection, loan application, and negotiation.  Once the pressure of those hurdles is gone, the buyer has time to think and often panics.  The St. Paul buyers' agent can help assuage some of their fears about buying, otherwise, the earnest money becomes the sellers'.
• Be transferred unexpectedly out of the St. Paul area after the purchase agreement is finalized but before the sale closes!  What a dilemma.  Sometimes the seller is amenable to releasing the buyer, but legally the buyer is bound to the contract.  If the seller doesn't release them from the contract and they don't purchase the St. Paul house, the earnest money becomes the sellers'.
• Back out of the purchase because the neighbor next door is prejudice!  This one hasn't been tried in St. Paul courts yet, but my understanding would be that the earnest money becomes the sellers'.
• The buyer doesn't show up for the closing . . . once, twice, and a third time!  The buyer might have forgotten the first time (fat chance) or mis-marked the calender (another fat chance!) but the second and third times are a clear indicator of default.  Eventually, the earnest money becomes the sellers'.
• The buyer uses his down payment money to buy a new car.  Without the down payment, the buyer no longer can purchase according to the terms of the contract.  This still is considered default because the buyer purposely sabotaged the St. Paul home purchase.  Guess what?  The earnest money becomes the sellers'.
• The buyer doesn't cooperate with the loan application by supplying requested information for the lender.  If the lender does not hide this information about the buyer and the purchase does not close, the earnest money becomes the sellers'.

Every one of these scenarios has happened to someone in my St. Paul real estate sphere.  In each case the seller retains the earnest money after a cancellation has been signed by the buyers and the sellers or legal action to cancel the purchase agreement is pursued.  In each case the buyers dropped their change and didn't bother to pick it up!

Comments

[Bonnie Erickson]

Aaron, You're right about small earnest money. I tell my buyers to plan on 1% for their earnest money, but that is not always possible. Even though the purchase agreement says both parties will sign a cancellation, legal action sometimes has to be taken in order to release the earnest money. If the seller doesn't want to hold their property up from sale because of legal action, then they often will sign.

[Aaron Dickinson]

Unfortunately many buyers are putting up so little earnest money that it seems almost a token anyways, instead of an "earnest" offer.

While our PA's do dictate the situations where buyers or sellers would be entitled to the earnest money, until both parties sign the Cancellation of Purchase Agreement, that money cannot be returned to either party. For those that choose to, this can in of itself become a bargaining tool, although I certainly have mixed feelings about it.