The Last Step Before Closing, Pre and Post-Coronavirus
[Note to Readers: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced. If you need legal advice, please consult an attorney.]
Once upon a time — like, this February — the last significant step in a home sale was the Buyer doing their walk-thru inspection just prior to closing.
Actually several, including making sure the home is left clean and empty, save for any personal property the parties have agreed on; verifying that there is no move-out damage; and looking for any changes in condition (ice dams?) that may have occurred since the Buyer did their home inspection four to six weeks earlier. See, “Home Buyer’s Final Walk-Through Inspection.”
Thanks to the Coronavirus pandemic, now there’s one additional step that trumps (sorry) all the others: is the Buyer still employed?
Of course, it has always been a (lender) condition of closing that there be no change in the Buyer’s financial condition after completing underwriting and before closing (usually, about a one month interval).
Typical concerns: filing for bankruptcy, divorce, or even financing an additional major purchase (like a car).
Fast forward to this Spring, when something like 30 million people have lost their jobs in just the last six weeks.
If even .1% of those newly unemployed were due to close on a home purchase, that means 30,000 jeopardized deals.
From Two Borrowers to One
If the Buyer is one of the unlucky newly unemployed, what happens next?
If the Buyer is a couple, and the remaining employed partner is financially strong enough, it’s possible that the original mortgage will still fly.
Alternatively, it may be possible to re-qualify the employed partner for a mortgage in their name only.
However, if neither of those options is available, and the Buyer can’t simply pay cash, it’s likely that the deal will be called off, and the Purchase Agreement will have to be formally cancelled.
What happens then?
Cue, “Statutory Cancellation”
At least in Minnesota, the simple case is that both parties sign a cancellation, and the Seller retains the Buyer’s earnest money as liquidated damages.**
Unfortunately, things become much murkier if the Buyer feels — with some justification — that their job loss was due to circumstances beyond their control (a pandemic!), and refuses to sign a cancellation until the Seller refunds some or all of their earnest money.
If the Seller isn’t willing to work with the Buyer on this — and they want to be able to sell their home to another Buyer — their recourse is to ask a court to step in to cancel the deal.
Perhaps that’s why a post I originally wrote on this subject a couple years ago, “Get Me Out of the Deal!”: Statutory Cancellation for Beginners,” has been trending on this blog the last 6-8 weeks . . .
**The disposition of the Buyer’s earnest money is governed by the Financing section of the Purchase Agreement.
In Minnesota, one option is for the Buyer and Seller to agree that if the Seller can’t obtain financing any time prior to closing, the deal is cancelled, and the Seller is obliged to return the Buyer’s earnest money.
For obvious reasons, Sellers try to avoid that scenario, and instead insist on a clause stipulating that the Buyer’s earnest money becomes non-refundable once the Buyer’s mortgage receives final approval (subject to certain closing conditions).
See also, “How to Blow a Seller’s Goodwill ” and a $150 Closing Gift“; “Who Blows Out the Home Sprinkler System, Buyer or Seller?“; “What if the Seller Isn’t Moved Out by Closing?”; “Closing Table Etiquette: Safe ” and Taboo ” Topics“; and “Changing the Closing Date” Multiple Choice.”