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Brad comments today on the inherent unfairness of canceling contracts.

Purchase and sale agreements contain contingencies that allow a buyer to cancel a sale in the event there develops an insurmountable issue. An inspection report that divulges undisclosed material defects on the property would be one example of such an issue. An unattainable mortgage despite being pre-approved by a lender, perhaps due to sudden job loss, would be another. A severe deterioration of the property between the time of the contract and close of escrow would also be a reason to cancel. Title problems, unavailability of insurance, overly restrictive community regulations or a low appraisal might be other legitimate reasons to terminate an otherwise binding agreement, as well.

The standard purchase and sale agreement contains a due diligence period, during which the buyer may cancel for any reason at all. That, too, I understand and have no problem with.

The above-mentioned provisions are part of the purchase and sale agreement for a valid reason: to protect the buyer. It is not any of these I am talking about.

What I am blogging about today are cancellations for other reasons: specifically, a buyer change of heart.

Lately, I have seen a level of buyer cancellations unprecedented by any other time in my real estate career.

I have been spending a good chunk of my time lately performing completely unproductive tasks: assisting parties to negotiate cancellations.

Short sales are responsible for a significant number of buyer cancellations, mostly because buyers are not willing to wait for short sale lender approval. In my opinion, this is ridiculous. Furthermore, it is usually a sign of agent incompetence. Before allowing a buyer to enter into a short sale purchase agreement, the buyer must be educated by his agent that a short sale purchase is not like any other. It requires a willingness (and ability) to wait for a very long time, often without updates. Short sales are neither quick nor without tedium. Copious amounts of paperwork and patience are standard fare, and no agent should ever allow his customer to bid on a short sale unless that buyer is tolerant and accepting of the waiting period.

A few months ago, I fired an agent (due to ethical concerns) who told me of his strategy: to write contracts for, and therefore tie up, several short sale properties. And when one of them gained short sale lender approval, the buyer would proceed with the purchase of that one, and all other contracts would be canceled. This is grossly unethical and unfair, because it often robs the seller of what precious little time he may have left before foreclosure.

It is my serious hope that our association, GLVAR, does something to address this ubiquitous and worsening problem. And soon.

Another common reason for cancellations over the last couple of years is buyers who are under the impression (often false) that since the time the contract was written, prices may have fallen further. Can you imagine if during the boom years, sellers would have been able to cancel if prices had escalated during the escrow period?

Frankly, when I think of cancellations, I think of poorly trained and inexperienced agents, who have either failed to grasp current market conditions, or failed to successfully convey that knowledge to their buyers.

It is my opinion that any time a buyer writes an offer on a property, the buyer needs to have full intent, barring any unforeseen circumstances, to actually close on the transaction.

When a buyer simply cancels because he finds another property, as another example, he is hurting the seller, not to mention the agents, title officers, mortgage brokers and anyone else who has invested time and energy into the transaction (most of whom receive no compensation unless the transaction closes successfully).

Then, after canceling, sometimes well after the due diligence period has expired, buyers expect their agents to fight for the return of their earnest money deposit, often when legally and contractually, they are not entitled to its return. The word “earnest” means serious. Placing earnest money funds into escrow with no clear intention of closing a transaction to me flies in the face of the spirit of the agreement.

I firmly believe that buyers need to be much more serious and committed to purchasing a property before they write an offer and tie it up. It really is tremendously unfair to do otherwise. And ultimately, I believe that their agents share some of the liability and burden.

Date posted: November 26, 2010