The coronavirus pandemic has put a real damper on so many parts of our economy, from restaurants to travel to retail to personal services and beyond. But one area where it’s also creating jitters is in the real estate market.
Recently, we heard from a buyer who was in the midst of closing on the purchase of a home. This particular buyer — spooked by the economic turmoil surrounding the coronavirus — wanted to pull out of the transaction.
So the question posed through our Ask Clark feature was, “What should I do? Should I back out of the deal?”
Possible Exit Strategies in a Real Estate Deal
When you’re buying a home, it’s customary to put down earnest money, which is a deposit from the buyer that gets placed in an escrow account.
The deposit, together with the signed purchase agreement, creates a legally binding contract between the potential buyer and seller.
“The buyer usually is given a period of time to have the home inspected and get financing approved. Most contracts have an ‘out’ for the buyer during the inspection period,” Consumer Action Center Director Lori Silverman says.
“If the buyer decides not to purchase the home after this time period then the buyer forfeits the earnest money.”
So that’s one legitimate possible exit strategy — but you have to surrender your earnest money in the process and you won’t get it back.
Meanwhile, Clark says another legitimate escape hatch would be if it was the lender (not the buyer) who was having cold feet because of the way economic winds are blowing.
“If the mortgage lender was no longer willing to supply the funds for the loan, that — under your contract — might be grounds for you not to have to proceed,” he notes. “But otherwise, you have damaged the seller if you choose not to go forward now.”
Consider if Your Cold Feet Are Really Warranted
Clark says we’re likely going to hear a lot of stories like this, where buyers get spooked and don’t want to proceed with a real estate deal because it doesn’t feel “safe” any longer.
But at times like these, his advice is surprisingly simple: “Think about your own situation before you choose not to go forward with closing on the purchase of a home.”
In general, if you meet the following criteria, you’re probably safe to proceed with closing as a buyer:
- Your job situation is secure and
- You’re buying a home that you’ll live in for many years
If either of these is not true, you should have your real estate agent contact the seller’s agent and negotiate a delay in the transaction.
Why a Delay Is Better Than Backing Out
If your job is already gone or may be at risk, that’s the time to do what you can to put the brakes on a real estate closing.
But the exact method by which you attempt that is important, too.
A delay is likely to be far more preferable to everyone involved than just backing out of the deal completely.
“Walking away and killing it definitely is not the first or second alternative,” Clark says. “If there’s a way to buy time and see what conditions are going to be later, then that may be the best alternative for many people.”
However, if you encounter push-back, Silverman suggests contacting an attorney if anyone who is a party to the transaction is threatening a lawsuit.
“Remember, your agent is going to do everything in their power to close the deal,” she notes. “Don’t be persuaded to close if it is in your best interest to hold off. It may be better to take the financial hit and forfeit the earnest money short term if you have concerns about paying the mortgage.”
While we can’t currently accept phone calls to our Consumer Action Center helpline, we can still answer your money questions! Visit clark.com/cac to submit your question and a Consumer Action Center volunteer will call you as soon as possible.