You need a lawyer.

why?

Because your liability is not limited to the size of the earnest money or deposit.

And because so much of this will depend on the laws in your state. And how the contacts are written. Could be easy, could be ugly.

Besides the $5k, the seller could take you to court to force through the sale and/or could sue you for damages considering you took the house off the market during prime selling season just to back out at the last minute.

The answer to this is in the contract, imskc. What does IT say?? I think you are pretty darn lucky to be able to afford walking away from 5 thousand bucks!

The contract is a standard Kansas realtor contract and says I would lose the 5K. Thank you for the feedback.

And the contract limits your liability to the "deposit?" Highly unlikely!

And if you knew the contract stated that, why did you post here?

Something fishy.

They can sue you for specific performance. A contract isn't just a ''dibs'' You legally agreed to purchase that house. You can be held to the contract.

My VERY NON LEGAL ADVICE is to talk to the seller. They may be willing to give you a waiver that accepts the $5,000 as full compensation for backing out of the deal. Tell them the full truth and ask them if they would be willing to give you a release. Most people see a lawsuit as a waste of time and often money. Then make the new offer contingent on release of the first (give yourself 72 hours or something to retain a release, don't make it indefinite), explain that the sellers will release you once your offer is accepted. Once the second offer is accepted try like hell to get the inspection before you get the full release. Once released you can't go back, if the new house has serious defects you will not be able to step back into your old deal on the old house.

As to what they "can" do. In most states, they can sue you for any real damages they suffered because you didn't follow through. So, if you are offering $200,000 and they sell the house for $175,000, then typically, your liability is limited to the $25,000 shortfall. Additionally, if they have already made another offer on a house and must make a monetary adjustment to that offer, you may be held responsible for that amount too. Most states will force the seller to limit their damages by attempting to find an alternate seller, but they don't have to take Herculean efforts to reduce it. While specific performance can happen, it would be unusual for a judge to make you buy a house that you can't afford.

All of this means nothing without knowing the specific laws of your state. These are just the most common aspects. Your state may be different, I have never worked in Kansas so I really can't tell you anything about Kansas. So my legal advice (which really isn't as good as my non-legal advice) is to see an attorney.

I am also a non professional.

I agree with the idea of having a conversation with the seller. You don't know until you have a go.

This reminds me of the time when here in Australia guzumping was all the rage. (I know this is the opposite of gazumping.) A house on which I had made an offer and had it accepted was sold to someone else. I didn't sue. I didn't even think of sueing. If it happened now though, I'm not sure what I would do.

Beyond the ramifications already listed above for backing out of the contract, which are weighty enough alone, are you prepared to accept that House #2 may go to a different buyer? And if those sellers/agent know you have already backed out of one contract, your offer may not be favored over similar, or even lower, offers.

Can you find out why House 2 has been relisted? If there was something significant that came up in the inspection and another offer fell through, it may be something that you may not want to accept also. So, IMO, even beyond the broken contract issue, House #2 is a gamble.

The buyers could not obtain financing. Sellers of house 2 want to move quickly. I haven't approached their realtor. Have no idea if they'd accept our offer. I did find a paragraph in my contract saying my sellers could sue us for our being in default. Interestingly enough my lender has asked for some more tax info before sending my loan approval to an underwriter. I wonder if we could halt the financing attempt and then also just be one of those who "couldn't obtain financing". I suppose our sellers could sue us for that but that would seem ridiculous since it seems to happen often. I won't speculate anymore. I really do appreciate the thoughts. I'll update in case anyone is interested.

As for the financing. Be careful when you start acting in bad faith. It may work often, but when it goes sideways it can get really bad. Some of those damage limits get thrown out the window, as the judge spanks you.

I usually ask for a statement from the lender explaining the reasons why the financing has fallen apart. If you get caught, your breach of Contract just crossed over to Willful Breach.

This has only happened to me once... my buyer was unhappy with the great home they were under contract and went with a waterfront home instead. They lost their deposit of $1000, $500 Due Diligence Fee, and all of the third party vendor fees. We actually just told the sellers our intentions and they were ok with it... I think this reaction from a seller would be the exception and not the rule.

@iamskc: "The contract is a standard Kansas realtor contract"

Nothing is 'standard' - never sign a contract for a large purchase without having it reviewed by a lawyer.

Whenever I made an offer to purchase I had one contingency - that I was able to find financing in x amount and at or below y% and for z years prior to the closing date.

Never had this questioned. And I never lost a purchase.

Well I did lose a sale. Got po'd at a neighbor that was having trouble selling his home. I put up a FSBO sign and "sold" my home in Silverdale, WA, for my asking price. I say "sold" because it was on a handshake and we were starting to get the appropriate sales agreement drawn and exchage of earnest money, etc. A couple of days later the "buyer" knocked on my door and explained he had found a better home for his purposes at a better price about a block from my home. I wished him luck, and put my sign back up.

I re-sold my home within ten days and that original "buyer" closed on his home about the same time I did on mine.

I was in this situation 25 years ago when my now-husband and I were engaged and looking for a house to move into after our marriage. We had also put down 5K, which was all we had and was a whopping big % on a $71,500 house. We thought that by "putting up" what we were going to spend on the down payment anyway, we looked stronger /in a good position to bargain.

We were satisfied with the house, but then our relator (who was a family member) came up with a genuinely fantastic, once-in-a-lifetime situation: A neighbor two blocks over came to her out of the blue and said, "I am definitely going to lose my house to foreclosure on Tuesday -- here are the papers. Do you know anyone who will buy my house for take-up-payments and just help me salvage a bit of my credit history?" The house was almost exactly the little ranch we were buying PLUS a whole walk-out basement with a two-car garage, a large family room, a small room that could've been for storage or crafts and a downstairs laundry. The kitchen in the original house was a little nicer, but that was the only negative And we could've had it for something like $65,000. Yes, we're talking about double the house for slightly less money. I wanted it. My husband wanted it.

However, we were already under contract, and -- as I said -- we'd rather foolishly put up what was all the money in the world to us at that point. And the house needed work -- mostly the nasty old carpet full of fleas simply couldn't have stayed. Even if we'd had part of the 5K earnest money back, we wouldn't have been able to afford to make the fixes, and it was nasty (the woman had two Great Danes living inside). My husband's father offered to lend us the money to do the minimal fixes, but we were young and poor -- I was still in college -- and we didn't see how we could make the mortgage payments AND pay him back.

We stuck with the original house we'd contracted to buy, and the relator-relative bought the other house herself. She and her husband allowed the owner to stay two months rent-free (out of the goodness of their hearts because she was in a bad spot), then renovated and sold it immediately for BIG BUCKS -- they made something like $50,000 in three months.

I still wish we had gone to the builder and had questioned him about the possibility of backing out of our contract. Maybe he would've said NO emphatically and would've been hard-nosed about it. Okay, we would've gone through with it and would've bought the house we ended up buying anyway -- we would never have made a dishonorable or underhanded choice. But I wish we had just talked to him to see where he stood. I just wish we had tried. It might've worked in our favor.

Another option: Could you afford to buy both houses and put one up on the market again right away? You'd lose something, but you seem willing and able to walk away from the 5K anyway.

Op knows better and doesn't use a realtor. Now he knows better about the contract and thinks there is no other liabilities. This will end up being one of those stories people will read on why to use a realtor. To stop you from making a decision that can get you sued into oblivion.

Most home owners would sue you immediately. They will find out you bought another house.. its not that hard to figure out what you did.

No, most homeowners would not sue immediately.

First, the contract may provide the earnest money/deposit is the liquidated damages for the seller if the buyer backs out. Even if not, most realtors and attorneys would advise that while real estate is one area where the law does recognize specific performance, the time and money involved in filing a lawsuit, fighting over it and then going to trial would not be in their best interests -- not if they really need or want to sell the house anytime in the next couple of years. And you start getting the buyer (and their agent and their lawyer) looking for ways to get out -- there is usually something that can still cause a hiccup in the deal. And then, assuming the seller did get the verdict they want (never a certainty), there is the issue of collection. You have to be able to collect on the judgment and most folks don't have cash to pay for a second house once they have bought one they really love. So most lawyers wouldn't take the case on a contingency -- you have to be able to collect for them to get paid. So the seller has to be ready and willing to pay a lawyer an hourly rate to go to court if a threatening letter doesn't work. Meanwhile, the house not selling gets talked about and the house and the seller get a reputation among the realtors in the community and no one will want to buy the house.

There is a practical side that would probably make most sellers accept the earnest money as liquidated damages (which may be expressly provideed in the contract anyway). But I wouldn't advise anyone to count on it and qalk. Best thing to do is talk to the seller and ask or a release. They don't have to know why -- just that something came up and purchasing this home no longer works for you. Most folks also wouldn't want to sell their home to someone they knew wouldn't be happy living there or that they had to force to go to closing. Reasonable people would work it out -- even if they weren't happy about it.

Most home owners would sue you immediately. - Suing someone who walks away from a home sale doesn't happen all that often. Without knowing the home price it is hard to say how good a $5,000 deposit is. But for most purchases that is enough to keep a lawsuit at bay. Remember that you can only sue for actual reasonable financial harm. Most judges are not going to call anything over a few percent reasonable (I would think that normally area realtor fees plus repairs requested will be the cap). It would be rare to get any kind of substantial judgement. Additionally, unless the contract you signed has a prevailing party clause, attorney fees in this type of a lawsuit will probably eat up the award. Then the seller owes their attorney whether or not they get paid.

Having said all of that, the funny thing about statistics is, whether rare or not you either get 100% sued or 100% not sued. So just because it is atypical doesn't mean it will not happen to you.

Again, my advice is talk to the seller, if they will not release you, then either go through with it or talk to an attorney.

Edit: lascatx beat me to it.

Lascatx- The op isn't a reasonable person otherwise he wouldn't be trying to worm his way out of a house he removed conditions on. Why should the seller be reasonable when the op is not. Its also not hard to file a small claims court case against the op. Don't need a lawyer for this. The sellers will win easily...

First - there is nothing unreasonable about wanting to back out of a deal. He is willing to pay a $5,000 penalty to do it. People back out of deals all the time, recently this very forum told someone who touched up the paint before inspection that they were out of luck when the buyer backed out using the inspection clause without even getting the inspection done.

Second - It is not an easy win. The damages must actually exist.

Finally, even people who get sued in small claims court often check with an attorney before going. The attorney is going to charge you $200 to help you write a motion to dismiss the case as the wrong court. Which will either seriously limit the award or more likely dismiss the case.

Edit: These lawsuits are rare for a variety of reasons. The $5,000 already paid will kick it out of small claims court in much of the country, and seriously limit small claims exposure in the rest. Not going to argue whether they should be rare or whether the OP is reasonable. Busted home sales are not rare at all, and lawsuits over them are.

I understand costs must actually exist.. But it's very very likely that will be the case if he backs away.

Who cares about a case that didn't have conditions removed as this is a completely different scenario. The op here does.

I cannot see any seller suing if s/he wants or needs to move that house anytime soon. A lawsuit would tie up the house for a L O N G time.. Work it out amicably.

You can sue for damages without it tying up the sale of your home

Mike, having a right or being right isn't the same as winning in court or it being worth going to court. And the damages won't be the contract price of the house. The seller would have a duty to mitigate the damages -- meaning they would have to continue to market the home and reduce or elimiate any loss -- then prove that any reduced sale price on a subsequent contract was the result of the failed sale. The difference must exceed the earnest money and make a battle worthwhile. If the contract price was a fair market value, that's not likely to happen. If the price wasn't a FMV, the jury might not be sympathetic.

No matter how certain you feel a case might be, any time you go to court, you roll the dice and don't know.

And as mrspete pointed out, if you don't ask ad don't try, you never know and will always wonder. Talking addresses both concerns.

Mike... Poppycock. I'm not a "he" nor am I "unreasonable". Changing one's mind when circumstances change is not unreasonable. It happens.

Anyway, my lawyer agrees with lascatx. As a matter of fact she didn't even go into the theory that most sellers won't take legal action. She read over the contract we signed and confirmed we can be released from it. She also felt confidant we could have our earnest returned but might have to "battle a little". We feel offering it as a sort of "sorry about this" is reasonable and right. HOWEVER, it's a non-issue. This afternoon I spoke to the sellers of house 2 and their bottom line is higher than my husband and I agreed we'd be willing to pay. Nor are they interested in a quick closing. Apparently they are not in a hurry to sell. I'm disappointed. And while I wonder if the doubts mean we really shouldn't move ahead with the purchase of house 1 I think we probably will. 'We made our bed so now we have to... you know' sort of thing.

Thank you again for sharing facts and your experiences.

Your lawyer advised you could get your deposit back even? What kind of non sense contract are you using. This is hilarious.

LOL......"battle a little" equals "attorney fees more than earnest"

What kind of non sense contract are you using. This is hilarious. - This is just a case where many people don't understand contracts. Without a liquidated damages clause they have no right to keep your earnest money...None. That is why I was saying that small claims court would probably not work. The seller sues the buyer for $3,000 of additional fees and the buyer counters for the return of the $5,000 earnest money. There is nothing in a standard real estate contract that entitles the seller to keep the earnest money.

Now on the other hand the sellers can sue. While they have to return your earnest money, they can sue for any losses they had resulting from the buyer's breach. Ultimately they have to return the money until they win a judgement for it. Which they probably will, if they bother to sue.

To alleviate the hassle some real estate contracts contain other provisions. The most common is a liquidated damages clause which says they can keep the earnest money. But that also limits their suit, they can't sue for additional costs incurred. It defines the minimum and maximum award for breach. Prevailing party clauses are also common, this means in case of a lawsuit the losing party must cover legal fees. I am a big fan of prevailing party clauses, as they encourage both sides to act appropriately, while discouraging silly lawsuits. A few states have standard contracts that allow earnest money to be kept while not limiting other remedies but these are usually also states with due diligence periods.

When earnest money is not kept by the party who was 'put out', I don't understand.

What, then, is the point of it?

Item 13 on the Kansas real estate contract states that if the buyer defaults, the seller may either sue for damages or keep the earnest money. http://www.homesinkansascity.com/wp-content/uploads/2012/07/2012ResidentialRealEstateSaleContract.pdf

When earnest money is not kept by the party who was 'put out', I don't understand. What, then, is the point of it? - Largely earnest money has no point other than signalling intent. Prior to the inspection period earnest money is, for all intents and purposes, fully refundable. The idea is that you are not likely to hand a significant amount of money to someone just to jerk them around.

@ Linda Doherty - On the face of the Kansas City real estate contract that is what it looks like. But if the seller had a realtor or someone else acted as trustee then they are subject to the code which for Kansas says:

(g) Upon acceptance of an offer and deposit of earnest money in a broker's trust account, such deposit may be disbursed only:

(1) Pursuant to written authorization of buyer and seller;

(2) pursuant to a court order; or

(3) when a transaction is closed according to the agreement of the parties.

Essentially it still requires a court order for the realtor or trustee to disburse the money to the seller.

@bry911: "Largely earnest money has no point other than signalling intent. Prior to the inspection period earnest money is, for all intents and purposes, fully refundable."

Well the OP said the inspections had been done, and they came to an agreement of what was to be corrected.

IMO either buyer or seller, you should have the contract reviewed by your attorney. Real Estate agents are not lawyers. The seller could have the contract structured such that the buyer would lose their deposit if they backed out, after approving the terms of the contract.

Always use a lawyer for big purchases.

Sorry it didn't work out for you, but it sounds like it was out of your price range anyway.

Using a realtor wouldn't necessarily prevent the situation you found yourself in. Sometimes agents will know of about to come on the market or find them faster than you might, but the fact that houses come and go all the time is just a fact in any market -- before or after closing.

@ geoffrey_b - The question I answered has nothing to do with the OP. I was simply answering a question about the the purpose of earnest money, which is largely just signalling. You are not likely to hand money to someone for something that you are not somewhat committed to. There are so many ways to kill a real estate deal that earnest money is little more than symbolic. Even at this point the OP notes that they can kill the financing. If you want to kill a real estate deal there are just a lot of ways to do it while protecting your earnest money. Beyond this point the OP can just take out a large personal loan from one of those high interest places, get $30,000 on a 12 month payment plan and no penalty for early payoff, which tanks your debt to income ratio and kills your financing. Immediately after the financing is dead pay off the loan plus a couple of hundred dollars interest and you killed the financing, with no recourse.

@bry911: "The question I answered has nothing to do with the OP. I was simply answering a question about the the purpose of earnest money, which is largely just signalling."

Then you continue to say: "Even at this point the OP notes that they can kill the financing"

Well if it has nothing to do with the OP - then why mention the OP now???

You are wrong! The earnest money can be anything you want it to be. You just have to have it stated in the contract.

Don't you understand that the lawyer you hire can determine the contract?

You are not a lawyer. Why argue? Maybe simple fools buy into your notion - not me. Done many deals.

This is silly - If you are just looking for an argument, I am not in the mood...I said largely. I could also say typically, what can be done is moot to the discussion of what is most often done.

You are wrong! Having graduated from law school I can tell you there are certainly limits to what an attorney can write in an enforceable contract with respect to earnest money.

Don't you understand that there are rules for contracts. There has to be an exchange of value. While you can write a contract that lets the seller keep earnest money even if inspection and financing contingencies fall through, it may have trouble standing up in court, which is why it is not done often. Even forgetting the fact that no buyer is going to commit more than a few hundred dollars to a contract that has unreasonable provisions for earnest money.

I am not a lawyer, I went to law school because it was free and interesting. I have done a few deals, mostly sale and leaseback, but they were still real estate. Only bought 10 or 12 houses though. Maybe simple fools such as the National Association of Realtors buy into my notion but please feel free not to.

Silly if I'm looking for an argument? Another words if I disagree I'm wrong?

Well bry911 - you didn't pass the bar (why not?). Further you have no experience - except what you learned in class.

Your opinion has no experience behind it. Therefore you have no more standing than an ordinary individual.

I've been involved with many contracts via my grandfathers holdings. There must be a reason you are not a lawyer. Your opinion speaks for it's self!

The National Association of Realtors is just a sales organization. Whatever works for them, in their own self interest is what they want. This is why I urge people to get a 'real' lawyer who can represent their best interests.

Realtors are not lawyers - they will tell you that. Further, there is no such thing as a 'standard contract' . As I said it works for the sales folks - not necessarily for the buyers or the sellers. Have a contingency that the sale first has to be approved by your lawyer within the first 48? 72? hrs.

So what do you do now, since you didn't take the bar?

I can't read all the above posts.

We backed out twice while looking for a house. Both times had to do with finding something better for the price. We lost the deposit once, the other time we did not. No one sued us. Who is going to do that? Maybe if you are buying a million dollar house, but even then, people move on. They want to sell their house.

Jane

The reason I said you were looking for an argument was that you posted I was wrong, and then proceeded to argue points I never made. In other words, you just created an argument.

Again, I answered a general question - what is the point of earnest money. Largely it simply signals intent. That is the point, are there instances that it acts in other ways - sure. My experience, which is plenty, is not relevant to the discussion, either I am right or I am wrong and my experience doesn't change that. There are thousands of sources that agree with me, is it possible that we are all wrong? Yes. But the fact that my opinion is well supported by a simple Google search and your opinion struggles with even a wikipedia definition of a contract should be some weight in my favor. The fact that I am not talking about every single real estate contract under the sun should also add weight. The fact that attorneys are also irrelevant to a discussion on most real estate purchase offers, as standard forms (and not individual attorneys) are used in most real estate purchase offers, should also favor my opinion.

Further, there is no such thing as a 'standard contract' - But there is. Many states even publish one for public use on .gov websites. Most area realtor associations publish a contract that gets used in an area, they attain popularity to the point of normality. Sorry that is what standard means.

As far as taking the bar. I guess I could but why bother? As I am a tenured college professor, a CPA, and a Dean of accounting and finance at a university, the bar would be spending significant time and resources to qualify for a job that would be a giant step back in my career. Not to mention the fact that maintaining my license for my CPA, CFP, etc. is enough work without piling on more continuing education. I can teach graduate level business law classes if forced to, and that is really all I wanted.

Edit: The whole attorney thing was brought up by you. I was talking more about economic signalling than I was contract law. You are the one that jumped on the fact that I am not an attorney and therefore must not know what I am talking about. The fact that I have a JD is simply evidence that if an attorney knows more than a regular person (your point, not mine) then it would follow a person specifically educated in the law, knows more than someone who isn't. To be completely honest, I knew this way before law school.

The point behind my post is that there are so many ways to kill most real estate deals that the earnest money really only shows that the buyer is committed to the deal. Even if the return of the earnest money is contractually guaranteed, you are still handing someone your money. That is not something many people do lightly.

Most real estate contracts contain both inspection and financing contingencies, both of which almost always trigger the return of earnest money and both are tremendously well suited to kill the deal. While the contract could probably be worded so that earnest money stays with the seller in a financing contingency failure, it is rarely done. An inspection contingency will trigger the return of earnest money, I doubt any experienced attorney will write anything else, it exposes the seller to a good faith action and can land both, the seller and the attorney, in hot water. Even in states where the seller keeps the earnest money in default there are often escrow laws that will require court action for dispersal in a disagreement.

We are speaking about statistics, not law. I am not advising that your contract should be this way or that you shouldn't hire an attorney, I am simply recognizing the fact that most are and most don't. If this offends you find some statistics to prove otherwise, in the meantime I attempted only to answer a question, and I am not going to continue a tangential argument.