Change of Heart Can Be Costly
Several years ago, I contracted to buy a house from an elderly couple who owned it free and clear. Sensing an opportunity for seller financing, I offered 10% down and 90% financing from the sellers. They accepted, with a 30-day closing.
About a week before the scheduled closing date, my agent received a phone call from the seller’s listing agent (who happened to be president of the local board of Realtors at the time). He said the sellers are now insisting on a 20% down payment and won’t sell without it.
When the message was relayed to me, I phoned the listing agent, very politely explained that we have a legally binding and enforceable contract, and if his sellers don’t deliver the deed as agreed, I’ll have to sue for specific performance of the sales contract.
Just for good measure, I added that a “lis pendens” (which means litigation pending) will be recorded to cloud their title and effectively prevent another sale or refinancing.
Two hours later, the listing agent phoned to sheepishly inform me, after he consulted his attorney, that the sellers would deliver the deed as agreed.
This is a classic example of why it is so important to know your legal remedies if the other party to your home purchase or sale contract is thinking of defaulting.
Remedies for home seller’s remorse
The couple in the situation above encountered a case of seller’s remorse. Perhaps a well-meaning relative said, “You’re not getting a big enough down payment.” Or maybe it was, “You should have gotten more for this beautiful house.”
Whatever the reason, home sellers frequently have second thoughts about selling after they have accepted a purchase offer. When this happens, smart agents counsel their clients about all the advantages of selling.
A polite reminder about the legal remedies available--primarily a specific performance lawsuit--usually brings sellers back to reality. If the seller refuses to sell, presuming the sales contract has no loopholes and is legally enforceable, a court can order the seller to deliver the deed as agreed.
Recording a lis pendens effectively prevents them from selling to another buyer or refinancing.
Remedies for home buyer’s remorse
Often it is the home buyer who defaults and decides not to buy. Buyer’s remorse can strike any time between the purchase offer’s acceptance by the seller and the sale closing.
However, this never-fatal disease frequently occurs soon after the professional property inspection, when buyers often become depressed if they can’t get the seller to repair undisclosed defects they’ve just discovered. When this occurs, smart agents will counsel their buyers about the advantages of buying the home.
When a home seller sues a defaulting buyer, monetary damages are usually sufficient. But many home purchase contracts contain a pre-agreed liquidated damages clause, so the buyers know their maximum default damages in advance. Many defaulting buyers are willing to “walk away” and forfeit all or most of their earnest money deposits to their sellers.
Of course, if the buyer can’t qualify for a specified mortgage when the purchase contract contains a mortgage contingency clause, the buyer is entitled to cancel the sale and get the earnest money deposit refunded.
But in very rare cases, when there are no other buyers for the property, the seller might sue the buyer for specific performance. This lawsuit is the opposite of the buyer suing the seller to deliver the deed. Here, the seller sues the buyer to force the property purchase.
The leading court decision is B.D. Inns v. Pooley, 218 Cal.App.3d 289,in which the seller built an 840-unit hotel to the buyer’s specifications. After the buyer refused to buy, the court ruled that monetary damages were inadequate (since there were no other buyers insight), so the buyer was ordered to complete the purchase as agreed.
Additional alternative remedies. If a lawsuit for specific performance of the sales contract doesn’t convince the home buyer or seller to perform as agreed, and monetary damages aren’t adequate, there are additional remedies available.
If the buyer and seller agree to mediate or arbitrate any legal disputes, these can be very effective remedies. However, home buyers and sellers should be aware there is no right to appeal an unfavorable arbitration award, normal evidence rules don’t apply, and there is no right to a jury trial.
When the rights of the buyer and seller are unclear in the dispute, another legal remedy is a declaratory judgment lawsuit asking the court, in effect, to decide “What do we do now?”
For further details on buyers’ and sellers’ legal remedies, please consult a real estate attorney.
Robert J. Bruss is a syndicated columnist, as well as a real estate investor, lawyer, broker and educator in the San Francisco Bay Area.
