If I purchased a home not on contingency and find I cannot come up with the down payment because my house either does not sell or sells for less than what I expected, what are the consequences? I assume that I would lose my down payment, but am I liable for anything else?
I am at a loss to understand why you signed a contract to buy real estate without including any contingencies.
There are many contingencies that can be included in real estate contracts. Oversimplified, the existence of a contingency in a contract means that if the event described in that contingency does not happen, then the contract can be declared null and void, the purchaser's deposit is returned and the seller cannot take any further action against the buyer. However, the drafting of these contingencies is important and the language must be specific.
One common contingency deals with a home inspection. Under this arrangement, the buyer has signed the contract, but the contract is contingent on the buyer obtaining a satisfactory building inspection report. If the buyer is not satisfied under the terms of the contingency with the inspection report, then the buyer can declare the contract null and void.
Another contingency deals with the sale of the buyer's home. Indeed, the contingency can be written for the benefit of the seller, in that the contract could also be contingent on the seller buying another home within a specified period of time.
However, by far the most important contingency in a real estate contract is the ability of the borrower to obtain financing within a specified period of time. Few of us are fortunate enough to be able to purchase real estate for cash. Thus, often it is important for us to make sure that we can qualify for a loan. Obviously, if we cannot qualify, we want to be able to declare that contract null and void and get our deposit returned.
The typical contingency in the Washington metropolitan area reads as follows:
"This contract is contingent on the ability of purchaser to secure or receive a commitment for the herein described financing ... . within 45 calendar days from the date of acceptance of this contract, which commitment or approval purchaser agrees to pursue diligently. ... . If after making every reasonable effort, purchaser is unable to obtain the specific financing ... . and notifies seller of this fact in writing within the term of this contingency, this contract shall become null and void and purchaser's deposit shall be refunded in full."
There are many forms that this contingency can take. Under the terms of the language written above, if the purchaser cannot obtain the necessary financing within 45 calendar days, and the purchaser notifies the seller of this fact in writing within the 45-day period, then the contract becomes null and void. If, however, he waits until the 46th day, it is arguable that the contingency has been automatically removed, and then purchaser must go to settlement, forfeit the deposit or even be sued for damages.
There are other kinds of contingencies of which buyers and sellers should be aware. One contingency often found in real estate contracts turns the terms around, and in effect states that if the purchaser is unable to obtain the financing within the requisite number of days, the contract becomes null and void automatically. The burden under this kind of contingency is on the purchaser to inform the seller within the 45-day contingency period that the financing has been obtained. Often, sellers have used this latter contingency as a means of declaring the contract null and void on the 46th day and trying to sell the house at a higher price to a new purchaser. Courts in the District have upheld the validity of these contingency clauses, giving the seller the opportunity to declare the contract null and void.
Thus, not only is it critical to include a contingency in the body of the written contract, but make sure you understand the impact of the contingency. It is also recommended that you count the days when you sign the contract, so that the buyer, the seller and the real estate agents are aware of the various target dates under all of the contingencies.
Unfortunately, you did not include a contingency for financing in your contract. You have to look to another section of the contract to give you guidance as to what rights the seller will have if you are unable to comply with the terms of the contract and buy the house. Often, under the heading of "Liquidated Damages," the form contract reads as follows:
"If purchaser fails to make full settlement, the deposit herein provided for may be forfeited as liquidated damages, at the option of the seller, at which event purchaser shall be relieved from further liability hereunder, unless seller notifies purchaser in writing within 30 days from date provided for settlement herein of his election to avail himself of legal or equitable remedies other than the said liquidated damages, which he may have under this contract."
I often recommend that the buyer modify this provision so that it reads: "If purchaser fails to make full settlement, the deposit herein provided for shall be forfeited as liquidated damages, in which event purchaser shall be relieved from liability hereunder."
If, however, you did not amend the contract, sellers have the following remedies:
First, they can decide to declare the deposit forfeited. This means the seller will take your deposit, plus all accrued interest, if any, and you will have no further obligation to the seller. This may be a cheaper remedy than being sued. However, the seller should be aware that often half of the forfeited deposit will go to the real estate companies that were involved in the sales contract. Thus, some sellers may decide that their damages are greater than the amount they will receive if they merely get the forfeited deposit and will look to other remedies.
Second, the seller can sue the purchaser for specific performance. This means that a court will be asked to order that the buyer actually complete the transaction. Specific performance is a remedy authorized in real estate transactions, and is often used when the buyer has the money but just does not want to complete the transaction.
A third remedy is a suit for damages. If, because of the buyer's breach of contract, the seller is unable to sell the house for a long period of time, and the seller ends up selling the house at a lower price than under the original contract, the seller may opt to sue for damages, rather than take the forfeited deposit. However, litigation is time consuming and expensive. More important, we follow what we call the American Rule of Legal Fees. Unless there is a particular law or a provision in the contract authorizing attorney's fees, both sides will pay their own legal fees, regardless of who wins the case. In England, the rule is just the opposite: The loser pays the winner's legal fees in addition to paying his or her own barrister.
I hope you will not lose your deposit. It may well be that there is some creative method whereby you can obtain the necessary financing so you will not be in breach of your contract.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.