A question that comes up very frequently upon signing a purchase agreement is, "What happens if a buyer backs out?" The seller always wants to know whether he or she will get the deposit.
I wish the answer was black and white. If that were the case, many attorneys would be out of work.
Deposits are generally forfeited unless all contingencies are met and it can be proven that there is a failure to perform or failure to disclose on the part of the seller.
Most contracts call for both arbitration and mediation. If all parties agree to arbitration and mediation, it is almost certain the deposit will not be lost until the arbitrator and the mediator both feel it is clear in whose favor the deposit should be.
If, after mediation and binding arbitration, it is determined the deposit should be forfeited, then the seller will receive it, or it may be fully or partially returned to the buyer based on the arbitrator's decision.
In a case where there is no arbitration and mediation in a contract, it can sometimes drag on even longer because the escrow will not release the deposit unless both buyer and seller sign an escrow cancellation.
In the event that it seems crystal-clear that the deposit should be forfeited but the buyer refuses to sign cancellation, there becomes a legal issue, which will likely be costly and time-consuming.
Generally, people prefer arbitration and mediation so resolutions can be determined quickly. We as real estate agents do not advise whether or not people should sign arbitration and mediation. We refer you to your trusted legal advisors for explanations and advice.
Another issue is the liquidated damage clause, which states that the buyer understands their deposit is at risk should they fail to complete the purchase agreement after removing contingencies.
In the case of arbitration and mediation, it strengthens the seller's position when all parties have signed the liquidated damage clause.
Keep in mind that most purchase agreements have contingencies, such as loan, inspection and appraisal contingencies. A buyer can get out for almost any reason without losing the deposit while the contingencies remain open.
The goal from the seller's point of view is to get the contingency waiver form signed as soon as possible.
Once this has been signed by the buyer, the buyer no longer has a way out; he has removed all conditions that allow him to receive his deposit back.
The only leverage he has then is to receive his deposit back by proving the seller has failed to perform or failed to disclose.
Normally, if all contingencies are removed with a signed contingency-removal form and the seller has performed in every way required, the arbitrator will rule in favor of the seller to retain the deposit.
There are always exceptions that might cause the ruling to be only a partial forfeit of deposit.
As you can see, the answer to who gets the deposit back is not always black and white. If you have any questions, you should seek the advice of a real estate attorney.
Ron Wynn has been among the top 100 agents in America for over 10 years, as noted on REAL Trends/Wall Street Journal. Ron has represented over 2,200 sales totaling over $1.5 billion in sales volume in his 30-plus-year career as a real estate broker in California.
He is a noted speaker, trainer, advisor and writer affiliated with Compass, and previously affiliated with Coldwell Banker for 20 years. He also provides weekly coaching articles for over 3,000 real estate agents worldwide and online.