This timely article came into my inbox this week from Real Estate Magazine (REM) Online. What happens if you get caught up in the frenzy of a bidding war, you win, and then start to have second thoughts a day or two later? In a market where significant number of deals, the majority perhaps, are multiple offer situations (the average sale price has reached 106% of asking price in London right now) there may not be the time or emotional space to make a careful, cautious, well reasoned decision. You’ve won. You’ve gotten yourself into a firm deal. You realize now you may have made the wrong decision. What are your options? (As a side note, this is why it is important to work with a REALTOR® whom you trust, who understands your needs, your situation and can be a voice of reason and give good advice in the middle of what is often a crazy and emotional time.) REM’s Mark Weisleder walks you through the various scenarios. Once you have a firm deal, your choices are limited and most of the outcomes are less than ideal, underscoring the need to make the right decision as you approach a multiple offer situation.
A major issue arising in bidding wars is when a buyer regrets their purchase decision almost immediately afterwards. Or worse, when their lender appraisal says that they paid too much and will not lend the buyer enough to close the deal. Here are five lessons to learn about the consequences of a buyer’s remorse in these situations.
1. Can the buyer simply refuse to pay the deposit, if it has not yet been paid?
In many bidding wars, this is not possible, as sellers are demanding certified cheques or bank drafts to accompany any offer. However, even if a buyer can either stop payment on an uncertified cheque or refuse to pay the deposit, they are still liable for damages. They can be sued by a seller for the difference in price if the seller subsequently sells for less money. In addition, even if the seller subsequently sells for more money, the buyer can be sued for the amount of the deposit that they failed to deliver.
2. Should a buyer agent approach the listing agent for a mutual release immediately?
Be very careful about this. If a buyer agent communicates that the buyer cannot close, then the seller could take the legal position and declare that the buyer has committed an anticipatory breach of contract. This would permit the seller to treat the contract as terminated by breach, and proceed to sue the buyer for the items listed above. It is best for these negotiations to be carried out by lawyers, to make sure that the parties’ legal position is protected at all times, if a settlement is being negotiated.
3. Is there a legal solution to this?
If there is sufficient time before closing, a buyer is permitted to assign their contract to a new buyer, who could take over their position and close with the seller. This is because unlike a contract with a builder, there is nothing preventing a buyer from assigning a re-sale agreement before closing. A buyer must understand that if they are asking their own agent to “sell” the property for them, they will have to pay real estate commission as well. Therefore, a buyer would have to assign their agreement for a price that is equal to the price they paid plus commission, just to break even.
4. Does a seller have to agree to this assignment?
In most cases the answer is no, unless the original offer contained a seller take-back mortgage. However, in practice, many lenders will not recognize the new buyer unless there is an amendment done to the original agreement to change the buyer name to the new buyer. This will require the consent of the seller.
In my opinion, this is unfortunate as lawyers routinely change how a buyer can take title by providing a direction to this effect on closing. Sellers should consent to this anyway, as long as the original buyer remains liable if the new buyer cannot close the agreement for any reason.
5. Can the buyer list the assignment onto the MLS system?
Theoretically, a buyer could list the property on an MLS system because they have a right in the contract that they can sell. However, most real estate board rules require that to list a property on their system, you must be able to show the property and without the seller’s agreement, this will not be possible.
I had a situation where the buyer could not close after winning a bidding war. I negotiated with the seller’s lawyer to permit the buyer to put the property back onto the MLS system and the seller would permit showings. It was also agreed that the buyer could not make any profit on this re-sale and that they could only recover their extra commission cost. The benefit to the seller was that their deal closed and the parties were able to save themselves from very expensive legal proceedings.
Anyone can close a simple real estate deal. When it comes to choosing or recommending a real estate lawyer, make sure you have one that can solve problems that can arise as well.
Source: REM Online