All the chaos and uncertainty in today’s world provoked an interesting question from one of my home buying clients. The question went something like this:
After all the buyer’s contingencies have been removed, can a home buyer cancel the contract to purchase as a consequence of the catastrophic event, such as an earthquake, and if so, at what cost?
A little known provision called Liquidated Damages covers this possibility. In technical terms, it states that should the buyer breach the contract, regardless of the reason or motivation, the seller’s sole right the damages is limited to the amount of the buyer’s earnest money on deposit but not more than 3% of the purchase price. And, the seller is no longer obliged to sell the property to the buyer.
What it basically means is that the buyer’s maximum liability is 3% of the purchase price. So if the purchase price was $100,000 and the buyer’s deposit was 3% ($3,000) and the buyer breached the contract, the seller gets $3,000. Even if the seller’s measure of damages was greater, the seller only gets $3,000.
This provision is widely used and accepted, but without a Liquidated Damages provision, a buyer would be liable for all of the seller’s actual damages.
The Liquidated Damages provision clearly benefits buyers more than sellers in terms of dollars, but it does allow the seller to sell the property to another buyer and move on with his or her life.
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Tags: first time home buyer, home buyer, real estate contract, san mateo county real estate, san mateo real estate
Raymond Stoklosa, Broker/Co-Owner
Chela Stoklosa, Realtor/Co-Owner
