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Buyers failed the good faith test, sellers contemplate next steps

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Q: I had a contract with a buyer to sell my home. A week before the closing, the buyer canceled the deal. The buyer said they couldn’t get the interest rate for their loan as listed in the contract, even though they were approved by the lender and the rate was well below current market rates according to our agent.

About two weeks after the proposed closing date, we discovered that they had signed a contract for our home and for a different home at the same time. In addition, our agent discovered that the buyers really didn’t want our home. It appears they only wanted our home as a backup deal if their other one fell through.

Do we have any recourse, and secondly how do we protect ourselves so that this doesn't occur in the future?

A: Your question poses some interesting issues. First, sellers like to assume that a buyer is coming to a purchase in good faith. That means, they’re making an offer because they actually want to buy the house. In your case, the buyers appear to have failed the good faith test.

We get how this could have happened. In a white-hot housing market, which the U.S. has been in for the last few years, particularly during the pandemic, sellers routinely fielded multiple-bid situations — sometimes with as many as 30 to 40 bids from desperate buyers scarred by losing many other multiple-bid situations. Still, putting two offers on two different homes simultaneously is a recipe for disaster, unless they were ready, willing and able to buy both homes.

So what can or should you do? For starters, make sure every buyer signs a contract for the purchase and sale of the home. Second, make sure the buyer puts down sufficient funds as a good faith deposit so that it would hurt the buyer to walk away from the deal.

In some parts of the country, the down payment or earnest money deposit can be a token amount of say $500 or $1,000. We’d rather see a number that’s significantly higher. How high? A number that would cause the buyer pain if they walked from the deal. For a home priced at $300,000, we’d expect to see the buyer put down at least $10,000 (and preferably more) as earnest money.

Then, if the buyer walks from the deal, the buyer could lose that $10,000. Any large sum of money will make the buyer think twice about putting down multiple offers on multiple properties just to see which one comes through. And if both houses asked for at least a $10,000 good faith deposit, the buyer might think twice before committing in writing to buy two homes.

Many purchase agreements contain a financing clause that allows the buyer to terminate the deal and get their money back if they are unable to secure financing for the purchase of the home. However, the buyer must show that they applied for financing and were denied that financing.

Given your question, it appears your buyer was able to get financing but was setting up a pretext to get out of the deal. You’ll need to hire a real estate attorney to assist you in contesting the buyer’s ability to get their deposit back. The attorney can look into the circumstances of the claim for the return of the earnest money and can direct the holder of the earnest money to keep that money until the issue is resolved.

That’s one of the best ways to make sure you get a buyer to honor the terms of a contract. You asked what you can do in the future, and the answer is to look at the purchase and sale agreement you signed. You might have everything you need there. You will need counsel to assist and represent you in enforcing the terms of the contract and cutting through the buyer’s “clever” maneuver.

If you suspect foul play in a real estate transaction, you need to make sure you have proper representation and the person representing you has your interests coming first. In many parts of the country, real estate attorneys do not represent the buyers or sellers in a residential transaction. The attorney may act as a settlement agent but does not owe a duty of loyalty to either the buyer or the seller. In those states, you need to be more vigilant to guard against this sort of thing, and you may need to hire your own attorney if the deal goes south.

You’ll have to move quickly. If the buyer canceled the deal and claimed that they couldn’t get financing, the settlement agent may have released the earnest money. In that case, it’ll be harder to claw back the deposit.

By the time you realized what had happened, it might have been too late for you to object to the return of the money. Given all of this, you likely didn’t do anything wrong. You just didn’t have enough knowledge to know that you should have objected to the return of the deposit to the buyer and insisted the buyers prove their inability to get financing was in accordance with the terms of the contract.

At this point in time, you can only move on and find another buyer that loves your home and then closes on the purchase.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website,


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