After you have signed a purchase and sale agreement for your home, the escrow process will get started. The buyer plays a greater role than the seller during this period, although you will want to keep your home in good condition and make it available for inspections and appraisals. You should review the contract for any contingencies that require action during this period, such as adding safety features, getting permits, making repairs, or clearing liens.
The seller remains responsible for the home throughout the escrow process until the closing. You will need to keep paying utility bills and mortgage payments, renew or update your insurance policy if needed, and prevent any problems involving vandalism or other security issues. If you live in a common interest development, you should keep up with paying dues to the homeowners’ association and notify them if you are leaving the home vacant. Keeping up with landscaping and maintenance is probably a good idea, especially since the sale will not be guaranteed until closing. You would not want to have the deal fall through and then have a dilapidated property on your hands. Payments for expenses that arise just before or just after the closing sometimes will be divided between the buyer and the seller.
Problems with Removing Contingencies
A buyer may ask a seller for extra time to meet a financing contingency, which makes the sale contingent on their receiving a loan. A seller usually will grant this extension, as long as they are confident that the buyer will eventually get a loan from the lender and is proceeding in good faith.
More complex negotiations can arise from problems related to an inspection contingency or an appraisal contingency. If the buyer’s inspection report reveals certain defects or hazards in the home, the buyer and the seller generally will negotiate over the repairs rather than abandoning the deal. You may need to offer a lower price to cover the costs of repairs, unless you arrange to cover the costs instead. If the appraisal estimates the value of the home as lower than the offer price, meanwhile, the buyer may pursue a different loan or increase the down payment to reduce the loan. In other situations, the buyer may demand a lower price for the home based on its appraised value. You may or may not want to move forward, depending on how soon you need to sell the home and whether you believe that you could get a better offer from someone else.
If any damage occurs to the home before closing, the seller is responsible for handling repairs. Significant damage probably will cause a delay in the closing date, which may allow a buyer to back out of the deal. Unless something extreme happens, the buyer will go through a final walkthrough of the home just before the closing to check for any issues that have arisen during escrow. They may ask for a slight delay in closing while repairs are completed, or they may ask for an escrow credit to cover the cost of any needed repairs. A deal rarely falls through based on an issue in a final walkthrough, since both sides have invested significant effort in getting to this point, and major problems are uncommon at this stage.
Backing Out of the Deal
The contract may provide certain grounds for a seller to back out of a deal, which means that you can put the house back on the market without any penalty. For example, you might have arranged to make the deal contingent on your buying your next home, although this is not typical. If the buyer has resolved all of their contingencies and complied with the terms of the contract, you cannot back out with no consequences for a reason not specified by the contract. Sometimes a seller wants to accept a higher offer that arrives later than the accepted offer, but this would result in a breach of contract. The seller and the buyer probably would need to proceed to arbitration or mediation, as provided in their agreement. While the result would depend on the situation and the state where you live, you might be ordered to sell the house to the buyer and compensate them for related costs.
(This is known as specific performance, which is an unusual remedy in breach of contract cases. The idea behind specific performance in real estate contracts is that each property is unique, so there is no way to adequately compensate a buyer through money alone for a seller’s breach.)
When the Buyer Backs Out
If the buyer backs out for a reason provided by the contract, they will be free to move forward, and you will need to put the house back on the market. If they back out for a different reason, you probably cannot force them to buy the house, but you would be able to seek damages. The damages award would be based on the delay in selling the home and the eventual price that the home receives. You would need to use proper diligence in selling the home to another buyer, which is known as mitigating your damages. Many contracts avoid the issue of calculating damages by providing that the seller will receive the buyer’s earnest money deposit as liquidated damages if the buyer breaches the contract for an impermissible reason.
Often, if there is a dispute over a breach, the seller and the buyer will agree for the seller to keep part of the earnest money deposit. This settlement can be cheaper for both sides than litigating the issue of whether a breach occurred. As the seller, you will not be able to provide another buyer with clear title to the property until you resolve this type of dispute.