Sometimes contracts cancel. The reasons for cancellations can be as diverse as the properties involved. A terminated contract often involves several folks being out money, time, and other frustrations. Before you walk away from your deal, think about what it might cost everyone involved.
Costs Incurred by Potential Buyers
Depending on how far down the road you’ve gotten with the contract, the potential buyers have likely shelled out money already. This includes:
- Non-refundable option fee: Paid to the seller.
- Inspection costs: Fees for property inspections.
- Appraisal and loan application fees: Charges for appraisals and loan applications.
- Earnest money: Deposited with the title company, which may or may not be returned to the buyer depending on their specific contract terms.
Seller’s Perspective
When a contract terminates, the cost to the seller is often harder to measure. It can be difficult to put a price on lost opportunity for another buyer to purchase the property. Market conditions and how long the property stays off the market during the contract matter a lot. The agent often needs to tell potential buyers why the last deal didn’t work out.
More tangible losses include:
- HOA documents: Expenses for ordered HOA documents.
- Repairs: Any repairs made for that particular buyer.
- Moving preparations: Sellers may have started packing, hired a moving company, or contracted to buy another property.
Agent’s Investment
The agent’s biggest investment is often their unpaid time working on the transaction. Most folks underestimate the substantial amount of time a Realtor and their broker spend in getting a property into MLS and marketing it throughout the real and virtual worlds. This includes:
- Upfront tasks: Measuring, staging, photography, and data input.
- Marketing expenses: Advertising and marketing costs usually come out of the agent’s pocket.
- Time and expertise: Agents spend time searching for properties, scheduling showings, and working with clients.
Title Company Expenses
From the time they receive the contract, the title company starts incurring expenses, which are not usually paid until the closing and funding of the transaction. Processing costs include:
- Search of records: Property records, tax records, deeds, plats, judgments, and liens.
- Outside fees: Tax certificate, attorney document preparation, survey, and obtaining payoff amounts.
- Research hours: Hours spent related to researching easements, covenants, restrictions, unpaid taxes, and assessments.
Lender’s Costs
The potential buyer’s lender also bears costs when a contract terminates. Getting the loan ready can be a lot of work and expense. It involves checking out and making sure the buyer qualifies for the mortgage. This includes:
Credit report, flood determination, and appraisal: Costs that may or may not be recovered from the client.
Termination Fees
When you decide to end your contract early, you might face termination fees, also called cancellation fees. These are charges you have to pay as a consumer. These fees can vary:
Flat fee or prorated calculation: Depending on the remaining term of the contract.
Tax implications: The amount billed for early termination is taxable under the same classification as the payments made under the contract.
Specific Examples
Cellular service contracts: Customers might sign a two-year contract with a $350 fee for breaking the contract.
Mergers and acquisitions: Termination fees can be substantial, as seen when Johnson & Johnson agreed to acquire Guidant, but Guidant later accepted a competing offer and was subject to a $705 million fee.
Mutual funds: Exit fees are paid by investors when they sell shares of a mutual fund.
Legal Considerations
Federal and state laws sometimes allow for contract cancellations:
- Cooling-off period: A three-day period to cancel contracts made during door-to-door sales or outside the seller’s usual place of business.
- Employment contracts: Severance pay and termination clauses outline compensation and procedures for ending employment.
Conclusion
Contract termination happens when a contract ends before everyone involved has completed their duties. It involves various parties and costs, making it essential to understand the implications and potential expenses. Properly drafted termination clauses and clear communication can help mitigate some of the associated risks and costs.
