Only a small percentage of home sales involve unhappy buyers and sellers. Most home sales are concluded satisfactorily for both parties. But to avoid becoming one of the buyers and sellers who wind up in court, it pays to prevent problems by knowing your legal rights.
Here are the three most common home sale situations that lead to litigation:
The buyer defaults. Some home buyers refuse to complete their purchase as agreed. The reasons may be "buyer's remorse" or displeasure with some aspect of the sale. A few buyers are just "difficult people" who refuse to complete the purchase unless they can negotiate either a price adjustment or a change of the sale terms.
Of course, if the buyer discovers a legitimate reason for canceling the sale, such as fraud or misrepresentation, the seller would have no legal recourse for the buyer's non-performance.
The easiest solution for the seller is to refund the defaulting buyer's earnest money deposit, obtain a signed release and put the house back on the market for sale.
However, before doing this the realty agent should be consulted because the agent's sales commission also is involved. To avoid misunderstandings and a claim for the sales fee, the agent's agreement to sale cancellation should be obtained in writing.
When the seller feels the buyer lacks a legitimate reason for canceling the sale, the seller can elect to keep the buyer's earnest money deposit. But the seller should be aware that the buyer might sue for a refund, even when the buyer willfully defaulted. If the home is resold for an equal or greater sales price, the defaulting buyer can argue that the seller didn't suffer any damages.
If the sales contract contains a "liquidated damages clause," the seller is on safer ground for keeping the buyer's deposit. Liquidated damages means the exact amount of seller damages cannot be determined so the parties agreed the liquidated damages shall be the amount of the buyer's earnest money deposit.
Even when a liquidated-damages clause is used, if the buyer sues for a refund, some judges will order the deposit returned if the seller suffered no damage.
The seller defaults. Home sellers sometimes catch the "seller's remorse" disease and refuse to complete the sale. Symptoms include a seller who either refuses to leave a home he or she has lived in for a long time or the seller decides that the sales price isn't high enough.
The disappointed buyer has two legal remedies. The most commonly used is to sue the seller for specific performance of the sales contract. Such a lawsuit asks the court to order the seller to deliver the deed as agreed.
Since each property is unique, the buyer argues that only delivery of the property will be adequate since money damages are impossible to calculate.
Defaulting sellers should be aware the buyer can record a lis pendens against the title. This is one of the few documents that can be recorded without the property owner's permission. It warns any buyer or lender dealing with the property of the litigation pending, which may affect the title. The practical result is to tie up the property.
An unhappy buyer's other legal remedy is a lawsuit for money damages. However, since exact damages are difficult to prove, the specific performance legal remedy is most often used.
But buyers should be aware the buyer's defenses to a specific performance lawsuit may include the sales contract was too vague for the court to enforce, the consideration was inadequate, there is unreasonable hardship on the seller and the seller's consent was obtained by fraud, mistake, misrepresentation or unfair practices.
A misrepresented property. The old real estate sales legal rule used to be caveat emptor, meaning buyer beware. Buyers were expected to discover any property defects before purchase and consider them when making a purchase offer.
This is still the rule in a few states, but most states now have laws or court decisions requiring property sellers to disclose known defects to prospective buyers.
But in all states, property sellers can protect themselves by disclosing in writing all known property defects. However, property buyers should ask sellers if they know of any defects other than those disclosed in writing. If a defect manifests itself after the sale, then the buyer can collect money damages only by proving the seller knew of the defect. Such proof can be very difficult.
Lawsuits involving buyer and seller defaults, as well as property misrepresentation, can be very expensive. The best way to avoid litigation is to know your legal rights and avoid taking unfair advantage of the other party to the home sale.