Is it possible to incur closing costs before closing on a home, by backing out of contract too late?

Question

Someone I know is purchasing a home and has already gone through the inspection, commitment period and all. While waiting on the lender and lawyers to get everything ready for closing, this buyer recognized a few reasons this purchase isn't a good idea for them and they're seriously considering backing out.

At this point, weeks after commitment and probably just a couple of weeks away from closing, the buyer expects to have to pay the ~$1k deposit/earnest fees built into the contract + the attorney fees for their and the seller's attorney. Buyer's lawyer warned that at this point, buyer may have to pay for closing fees as well since most of that work has been done, and that they could be sued by the seller. Whether or not the seller suing is a real risk and what damages it would be for is a bit up in the air - since the seller hasn't been living in the house for a while, from what I know, I doubt there are severe costs/damages the seller would sue for. What I question is that the buyer would be liable for closing costs if they back out before closing, on the basis that most of the work for closing has already been done. As for what this buyer would owe the lending bank, I can imagine the assessor fees and a title fee, and I believe they already paid for the assessor when the assessment was done.

Is it possible to incur closing costs by backing out of a real estate contract too late, even if it is before closing? If so, would that be full closing costs or just partial costs, and how can that be determined?

Answer 1

It is always governed by the terms of the contracts involved. There are likely two contracts. One between the buyer and the seller; and one between the buyer and their agent.

Those contracts should specify the deadlines for the steps in the process, and the damages/cancellations that apply to those provisions.

Assuming that there are provisions that address this, yes the seller probably has damages. They picked the buyer and rejected other offers. Getting another offer may take weeks or months, then they have to wait for more inspections, and the rest of the closing process to complete. But the contract provisions cover this scenario.

Keep in mind the buyers lawyer will make the damages sound as bad as possible to convince the buyer to complete the purchase.

The fact that most of the work has been done, does mean that those people expect to get paid. The appraisers, and inspectors did their part. There is no expectation that a new buyer will accept any of those reports, so they would have to be done again. Somebody will have to pay for their work.

Answer 2

A home sale contract typically assigns certain costs to be borne by the seller and the buyer. Anything the seller is committed to pay for can be considered a damage- title, survey, appraisal, property improvements or repairs done for the buyer, etc.

There are also damages arising from the failure to execute the contract. If the market value goes down your friend could be liable for the difference in the purchase price of the house. If the house develops a serious problem between the original closing date and the sale of the house your friend could be on the hook for fixing that, since it originally would have been his problem. Any cost the seller incurs due to the failure to execute the contract could fall on your friend.

By default the seller will claim the earnest money as automatic damages, but the actual damages will likely be far larger once you start talking about closing costs. Many states make it easy to sue in small claims court for values up to $15,000 or $25,000, so I would assume your friend will end up paying any and all of those damages.

This doesn't answer whether or not your friend should reneg on the contract. I would guess that in most cases it's better to walk away from a contract and take the risk of paying $5,000 or $10,000 in damages than it is to be stuck with a house that you don't want to own. The best case if he walks away is that he's only out the $1,000 earnest money. The worst case is that he's stuck paying actual damages, which he can estimate himself.

If he were to execute the contract and then turn around and try to re-sell the house he didn't want then the best case is that be paying around 6% of the home's value in sale costs, and assuming this is a $100,000-$200,000 home then he would be looking at $6,000-$12,000 in sale costs. It doesn't expose him to any less risk than just walking away either- if the market goes down or the house develops a major problem then that will happen regardless of whether or not he executes the contract. The only difference is that if he walks away the seller has to fight him to pay damages, where if he executes the sale then he's automatically assumed those damages.