5

We are the sellers. Our contract explicitly states 2 things:

  1. The Buyers can back out based on the inspection and receive earnest money back.
  2. Sellers will not provide money back at closing, or make any repairs based on inspection report findings.

The buyer ignored item 2 and asked for money back anyway. Our broker advises us to address this in the normal fashion (accept or negotiate etc.), but it begs the question: Are we basically writing a contract with no teeth in regard to the inspection - no money back clause?

Is my broker correct in stating, this is basically wasted verbiage in a buy-sell since the buyer can still terminate based on the inspection report? I always pictured the scenario where the buyer asks for money anyway, seller refuses, buyer terminates because seller refuses, buyer loses earnest money because of item 2 above, court would find the buyer in breach of contract. My broker is quite adamant that's ludicrous. The escrow company in this case would refuse to even consider this and the earnest money would be distributed - I would have to sue to attempt to enforce this. Why then even state item 2 above in any contract?

  • 15
    Your contract says that the buyer has the choice to cancel the deal and get earnest money returned. The buyer is making you an offer to agree to a different contract, which you can accept or reject. – chrylis -on strike- Dec 24 '19 at 6:17
  • 1
    There’s no point as such in making it a contractual requirement that you won’t do repairs or reduce the price after the inspection, but it’s worth communicating it formally or the buyer somehow, and putting it in the contract accomplishes that even though it is of no actual legal effect. – Mike Scott Dec 24 '19 at 16:28
  • @MikeScott: Bingo. The only way that putting the information in the contract could have any legal effect would be if one could show that the would-be buyer had no realistic expectation of buying at the agreed-upon price, and would not have done so even if the inspection revealed nothing the would-be buyer didn't already know. While one might be justified in witholding the earnest money if one could prove such bad faith on the part of the would-be buyer, proving such bad faith would generally be difficult. – supercat Dec 24 '19 at 22:18
  • "I always pictured the scenario where the buyer asks for money anyway, seller refuses, buyer terminates because seller refuses, buyer loses earnest money" - To get the effect you want there you'd need verbiage more like "The Buyers agree that any request for repairs or money back at closing will be considered a breach of this contract, terminating the sale and forfeiting any money paid". And buyers foolish enough to agree to it. And a court/judge that's not going to strike a term like that down on "public interest" grounds. – aroth Dec 25 '19 at 5:02
18

You've essentially made an "as-is" condition. You're letting it be known that you're inflexible on that item; they shouldn't bother trying to negotiate money back at closing or repairs prior to closing. If they try anyway and you decline, they don't forfeit earnest money; they're still within their rights to terminate based on inspection results so long as they follow the timelines in the contract.

It's not pointless as it communicates your position. The wording of the two items lets buyers know that if they want to negotiate based on inspection results it has to be on purchase price rather than requesting money back at closing or repairs prior to closing.

  • 1
    "negotiate ... on purchase price"? I assumed the contract already fixed the purchase price -- isn't that kind of the point? To change the purchase price, the buyer would have to back out and then make a whole new offer. – nanoman Dec 23 '19 at 20:30
  • 3
    @nanoman The contract sets a price, new information comes from the inspection, negotiation follows or the buyer backs out. If the seller will negotiate you can keep the existing timelines rather than reset the clock on the whole process which is usually preferable to the seller rather than going back on the market and taking new offers. – Hart CO Dec 23 '19 at 20:38
  • 2
    Okay, but if you can renegotiate the price stated in the contract, you can also renegotiate item 2. I don't see that one is obviously more negotiable than the other. – nanoman Dec 23 '19 at 21:10
  • 3
    @nanoman You can try to negotiate item #2, but the seller is telling you up front not to bother trying. It all can be negotiated, but easier to communicate up front what we will/won't budge on to make the process smoother. – Hart CO Dec 23 '19 at 21:27
19

I think your broker is correct. Item 2 is to clarify expectations and prevent any perception that discounts or repairs are being offered. It does not say that the buyer forfeits the earnest money just by asking for a change in terms. The contract has been accepted by both parties; either of you is free to propose changes (attempt to renegotiate), and unless that proposal is accepted by the other, the existing contract stands. Making such a proposal is not a breach of contract.

7

(Disclaimer: I work for a company that does housing contract negotiations daily, but IANAL.)

Are we basically writing a contract with no teeth in regard to the inspection - no money back clause?

Sorta. The contract is a "point in time" negotiation: it says, at the time it was written, you will not be making any repairs (under the assumption no repairs have been determined) and will not be covering any cash back / closing costs (under the assumption the price is fair).

If the buyer has an inspection done, and it is a justifiable contract termination point, the buyer saying "I want you to fix / cover costs for 'x'", you refusing, then the buyer backing out does not mean you can keep the earnest money. The buyer had the opportunity to back out regardless, they gave you, the seller, an opportunity to prevent that with a contract modification.

The original contract still stands, and your clause likely won't stand up in court. The only enforcement of the clause is that, should the buyer keep through the process, you WILL NOT be making the repairs at that point nor offering cash back.

As mentioned in the other answer, you offered the house "as-is", and agreed on the price. If you're going to agree to allowing a buyer to back out due to an inspection (which, you'll be hard-pressed in this market to find a buyer without that clause) your "as-is" clause can stand, but if the buyer backs out the earnest money is rightfully theirs.

Is my broker correct in stating, this is basically wasted verbiage in a buy-sell since the buyer can still terminate based on the inspection report?

I wouldn't say "wasted", just "unenforceable." You are making the point you don't want to do any repairs (as is your right). But, the buyer sets the "earnest money" terms, not you. You simply agree whether those terms are acceptable or not.

I always pictured the scenario where the buyer asks for money anyway, seller refuses, buyer terminates because seller refuses, buyer loses earnest money because of item 2 above, court would find the buyer in breach of contract. My broker is quite adamant that's ludicrous.

Your broker is correct. I watched this situation unfold earlier this year, and the exact result was the opposite of that. In fact, the seller took it to court and lost more money because the court asserted that it's an unreasonable expectation, and put the buyer's court-costs on the seller.

Basically, the buyer is proposing a contract modification, you are rejecting it. As such, you are not entitled to the buyer's money at that point, because the original clause of the buyer being permitted to back out due to inspection results still stands. It superceeds your "no repairs / no money" clause.

The escrow company in this case would refuse to even consider this and the earnest money would be distributed - I would have to sue to attempt to enforce this. Why then even state item 2 above in any contract?

Item 2 is still a valid concern for you if you'd like it to be, but it's not a valid way to take money from the buyer. You are terminating the contract at that point (as is your right), not the buyer. (In fact, when my company sends contracts out, we have several valid seller terminations that result in no earnest money payouts, and several valid buyer terminations that also result in no earnest payouts, such as sex offenders being located in the neighborhood and such.)

Personally, I see sellers with "as-is" clauses all the time, and about 40% of the time they throw it out at some point in the process. (By that, I mean, they agree to a certain repair, or cash back, or a price alteration.) You don't have to, but keep in mind that if you don't agree and the buyer backs out, you are not entitled to the earnest money, because the buyer backed out justly.

Think of earnest money as a "if I decide to back out of this house purchase for a reason not listed in my contract, you get it." The seller's contract almost never matters.

0

Consider this: Any inspection, or practically any inspection, will find some faults that would need fixing. It's normal. When we negotiate the price for a house, it's based on the assumption of a normal number of faults.

If the inspection finds nothing wrong at all, then the buyer is getting a bargain. The terms make it clear that if there is a normal number of faults, the seller isn't going to reduce the price. The buyer is free to cancel to contract, which would be daft since a normal number of faults is to be expected.

If the inspection finds an abnormal number of faults, or some fault that is really expensive to fix, then the house isn't worth the negotiated price. The seller says he will not reduce the price, so most likely the buyer will pull out. Or quite possibly the seller will realise that the house wasn't worth as much as they would have liked and either pay for fixing the expensive problem or reduce the price.

But essential the clause "no price reduction" communicates that the buyer should expect a normal number of faults and the seller isn't going to reduce the price in this case.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.