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Buyer's remorse remedies

Published: Nov 13, 2003 3:51 p.m. ET


A few pointed reminders for those feeling squeamish



SAN FRANCISCO (Inman News Features) -- Although 2003 has been a record-volume sales year for new and resale homes, there are always those few home buyers who catch the dreaded "buyer's remorse" disease, especially during the traditionally slow selling season we're entering now.

Fortunately, the disease is never fatal and proper treatment by a savvy real estate agent can usually cure the malady, resulting in another successful home sale.

For example, just a few days ago, I encountered a long-time Realtor at a local coffee shop who shared the sad story of her buyer for an expensive house who fears mortgage interest rates might drop in the next few months and maybe he should wait to buy because home prices could fall.

I politely reminded my realty agent friend it sounds like she should bring out her remedies for home buyer's remorse disease. These remedies include:

1. Remind the buyers of the benefits of homeownership

Many home buyers forget during the home purchase quest why they are buying. Often a quick reminder of homeownership benefits, including the income tax deduction savings, probable home market value appreciation, security and pride of ownership, and home investment benefits, which are difficult to beat, is all it takes to cure the buyer's remorse.

2. Possible adverse consequences of not completing the purchase

Occasionally, reminding a home buyer of all the homeownership benefits is not sufficient to cure the buyer's remorse. If that happens, the realty agent should be prepared with more serious treatment.

That means informing the buyer of the possible adverse consequences if the buyer doesn't complete their contract to buy the house or condo. Presuming the purchase contract was properly written to include buyer protection contingency clauses for finance and appraisal of the home as well as a professional inspection contingency clause, reluctant home buyers might be able to legally escape if one of the contingencies can't be met.

To illustrate, at a recent meeting of my college Real Estate Law class where we were discussing home purchase contracts, one of the students said it's easy for a buyer to get out of a home purchase by failing to apply for a mortgage. That gave me a great opportunity to cite a case in our textbook where the home buyer sued the seller for return of his buyer's deposit. But the court ruled against the buyer because he never even applied for a mortgage.

Forfeiture of the buyer's good faith deposit is a strong deterrent to buyer's remorse disease victims who consider canceling their home purchases.

3. The long-term appreciation of home values in the community

Most Realtors have local statistics easily available showing how market values of houses and condos in the community have appreciated over the long term. Although there are peaks, valleys and plateaus in the local home appreciation trends, for most communities the trend is always up. Nationally, the National Association of Realtors reports the average annual appreciation rate for home values is about five percent a year on a long-term average.

Thanks to the magic of leverage, the local annual home value appreciation rate usually shows houses and condos are far better investments than any alternatives.

For example, suppose the purchaser suffering buyer's remorse is buying a $200,000 house with a 10 percent cash down payment of $20,000. If that home appreciates a typical 5 percent in market value in the next 12 months, it will be worth about $210,000. However, that $10,000 increased market value is an outrageous 50 percent return on the home buyer's $20,000 cash down payment. Is there any better investment than your own home?

4. Legal consequences of default

On the way home after talking with my Realtor friend at the coffee shop, I thought about the possible legal consequences if her home buyer defaults and refuses to complete the home purchase. There are several possibilities, in addition to forfeiture of the buyer's good faith earnest money deposit.

If the buyer refuses to complete the purchase and breaches the purchase contract, the home seller might sue the defaulting buyer for monetary damages.

This situation could arise if the home eventually sells to another buyer for less than the first buyer's purchase offer and if the sales contract did not include a liquidated damages clause to limit the seller's recovery.

The customary legal remedy of a home seller who is harmed when a buyer defaults is a lawsuit for money. However, if the home is unusual or very expensive and there are no other prospective buyers for it, there are a few court decisions awarding "specific performance" to force the home buyer to buy under the contract terms.

But the specific performance legal remedy, when the seller sues the buyer, is rarely used because monetary damages are usually the easiest and best remedy for the home seller.

However, in rare cases such as where a home builder constructs a unique, expensive house for a buyer who then refuses to complete the purchase, specific performance of the purchase contract might be awarded to force the buyer to buy.

5. Mediation or arbitration

Depending on the terms in the home purchase contract, when a buyer suffers an extreme case of buyer's remorse and refuses to proceed, mediation or arbitration can avoid a costly lawsuit.

Nonbinding mediation is a relatively inexpensive attempt by a professional mediator to reach a compromise or settlement with the buyer and seller. Advantages are a quick, inexpensive resolution of the dispute. Possible disadvantages occur if the mediation is not successful after the buyer and seller wasted a day of their time and the mediation cost.

Binding arbitration applies, however, only if the parties agreed to it in their sales contract.

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