Can a Seller Sue the Buyer if the Buyer Walks Away From Escrow?

Westcoe Realtors, Riverside Ca…So, this is a horrible situation to have to blog about, but sometimes it happens. Sometimes, a buyer just says “Forget it”, and walks away from their obligation to close the escrow. The question then becomes….can the seller sue the buyer if the buyer bails out and walks away from the escrow?

Well….it depends, and we have included below a few of the things that could determine what a seller can do.

(Before we begin here, once again we are including the caveat that we are not attorneys, and are only addressing this situation as experienced real estate professionals, and therefore you should check with an attorney with any specific problem you may have.)

Now that our “CYA” disclaimer is in full view, here are some of the items you will need to know before you just run rampant in the courts if you (as a seller) every find yourself in this position.

First, when did the buyer bail? Generally, a buyer gets a 17 day time period (this 17 days can be altered in your contract, but the norm is 17 days) to make investigations, gather information, and check out a home to decide if they really want to complete the purchase. Call it an “engagement” period…and at the end of said 17 day “engagement” period, the buyer then decides whether to go ahead and get married, or leave the seller at the altar. Therefore, if your buyer is bailing out on your escrow during this 17 day time period, then they are generally within their rights, and the seller has no recourse but to put the home back on the market and look for another buyer. Sorry, no lawsuit here.

Secondly, if you are past the 17 day period, were the buyers contingencies removed in writing? Even when the 17 days referenced above have passed, and the buyer has not cancelled the escrow, the seller must still have all the buyers contingencies removed in writing…and if the seller doesn’t, then said contingencies are considered to still be a part of the transaction. At the end of this 17 day time period, the seller must get in writing from the buyer that they are proceeding with the sale. This is done by having the buyer remove any contingencies in the sale. If for some reason the sellers real estate agent got lazy, or forgot the time frames, or whatever, and never got the buyer to remove the contingencies in writing, then the buyer can still walk away from the sale with no penalties. Very important document here, so make sure you, as a seller, get it when your 17 days are done.

Did you and the buyer incorporate the Liquidated Damages clause into your purchase contract? Liquidated damages basically says that the buyer and seller agree to use the deposit to satisfy any damages the buyer may have caused the seller in an event just like this. The dollar amount is limited to the amount of the buyers deposit or 3% of the sales price, whichever is less. To be a part of the contract, this clause must be initialed by both the buyer and the seller. So…if this clause is part of the purchase contract, then the seller can’t sue the buyer….their only remedy is the deposit amount in escrow up to the max. of 3% of the sale price. Check your contract (paragraph 22 in the most current edition) to see if you agreed to this when the offer was presented. If so, then you may have a right to the buyers deposit, but you can’t sue them.

Lastly, with rare exceptions, anything that can go to small claims court must go to small claims court. As of now, the limits to small claims court are $10,000 for individuals and $5,000 for businesses. Therefore, if your damages are lower than those limits, you have no choice but to use small claims…so you better have proof of your damages…and “emotional duress” doesn’t work.

As a final note, the general tone of a real estate purchase contract is to keep buyers and sellers out of court. However, if you really need to go down that road, then make sure you have an attorney who will really give you a straight answer, because most real estate contracts take about 3-5 years to get into court, and the costs you incur will be anywhere from $50,000-$150,000 to just get there! It’s not a pretty picture, and that’s why we understand most real estate matters get settled waaaay before you get to court.

Good luck, and make sure you have taken a breath or two, counted to 10, and really removed all the emotion from your decision to sue someone…it’s just too expensive and time consuming to due out of anger.

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