When I started in real estate in 1999 it was also a seller’s market. I was encouraged to write my contracts with the clause “Specific Performance” selected. The reasoning was that it showed good faith and was a stronger term in writing the contract. If my buyer was to default the deal, they wouldn’t just lose their earnest money, the seller could sue the buyer for full value of the sale plus damages. Hard-wired early on in my career was this thought: if you’re gonna write it up, be prepared to see it through to close. Your word is your intent.
I was taught the old school way to write contracts. I still like Specific Performance. After all, the buyer controls the risk. If they’re serious, they should write the contract that way. They write all the dates and deadlines anyhow, so there’s no reason those dates and deadlines shouldn’t work for them – they wrote them. But the last offer I saw with a specific performance clause selected in a resale contract was in 2000. I wrote that one. I haven’t written one since. But I still have one common trait: I work with buyers that intend to close.
This is not because buyers never back out of a deal. In Third Quarter 2016, the largest number of homes to sell in a single quarter in Colorado Springs History blasted through with 4318 single family units closing. That’s a lot. But the scary bedfellow to that number: 1133 homes came back on market that same quarter. For every 3.8 sales, 1 deal fell apart. But locally at least, buyers don’t expose themselves to much risk and always (like 99.99% of the time always) select Liquidated Damages: “If I flake out, you can’t sue me, you can just have a check”.
A buyer may not think $3000 to $5000 of earnest money is a lightweight risk. But to a seller that has to go back on market 20 to 40 days after accepting a contract, usually with their house now vacant, possibly into a season that is now in a weaker sales cycle, and likely with the next offer that is not as good as the one that’s walking away… getting that earnest money might cover two months worth of expenses and that’s it. Yeah, it’s better in some ways than a termination where you get squat. But a termination usually happens in the first ten days of a deal. The house might still be showing. There could be back-ups in the wings. A default usually happens on a deal that’s considered to be ready-to-close, a sure-thing, twenty to forty days into the deal. In that case, the 1 – 1.5% of sales price earnest money awarded to a seller is really a pittance.
The reality is that buyers do default. I had one client default in my first 12 years in the business, and it was in Spring 2009 when the wheels were falling off the economy. My buyer lost his job ten days before closing, after his loan objection. Then I had three in 2011-2012. I just had another this past September. It can happen. In addition to job losses, wobbly marriages and relationships can force buyers out of a deal (that was one) or, wobbly marriages and relationships can suddenly reconcile (that was another, when a recently separated single mom got back together with her estranged husband and walked away from a deal). They can be the product of someone else’s changed heart (that reconciled marriage killed the deal my buyers wanted to buy) or someone’s complete and total cluelessness (in September, after applying for their loan, buyers on a listing of mine tapped a non-disclosed student loan for $25,000 in “deferred payment” charges… and annihilated their qualification when the lender re-ran credit a week before closing).
In a market such as this one where there is a record shortage of inventory, it is perilous for a seller to accept an offer.
Read that again: It is perilous for a seller to accept an offer. History says that if you go back on market, you won’t sell for as much the second (or third) time around. But in the last two years, all but one of my listings that came back on market got a higher value offer the next go around because this market has extreme scarcity and my listings have an even great advantage in it due to their appeal. But historically, this just does not happen and you can’t bank on it. I have had five listings go under contract this year and then come back on market: one was a default (the student loan situation) but I can’t rightly say that the other four were truly in good faith. One buyer decided not to deliver their earnest money the day it was due because they “discovered” an apartment complex six blocks from the house that didn’t “feel right”. Another one of the terminations we made some significant accommodations for and got the deal put back together with everyone happy at closing.
I’ve been involved in bidding wars on 9 of my listings and 6 of my buyers this calendar year. That’s a little less than 1/3rd of the time. Ir’s not as common as the industry likes to present it as, but it’s far more frequent under $250,000 than over $400,000. But it does happen and I have had three different situations this year where my buyers walked away from houses to avoid bidding wars with price tags over $600,000. My buyers know they’re going to close and they don’t want a flighty buyer that lacks such intent to run up a price on them. In two of those three situations, where my buyers walked away from over $600K bidding wars… the deal they put together, later fell apart.
A “sure thing” is very subjective, and enlisting a combination of strategy, experience, data, relationships and political skills is the only way a seller can protect themselves from the full-weight of real estate’s emotional and financial pratfalls.