With the recent rise in interest rates, many buyers are finding themselves in the precarious position of failing to close on their real estate Agreement of Purchase and Sale (APS). An APS is a binding legal contract between the buyer and seller of a property. If either party fails to fulfill their obligations outlined in the contract, they can face significant consequences.
The Nature of an APS
An APS outlines the terms and conditions of the sale, such as the purchase price, the deposit amount, the closing date, and any conditions that must be met before the sale can be finalized. It is a legally binding agreement, meaning both parties are obliged to fulfill their parts of the contract.
The Consequences of Failing to Close
- Loss of Deposit: The most immediate consequence is the potential loss of the deposit, which can be a significant sum of money.
- Additional Costs: If the seller is unable to sell the property for the same price to a different buyer, they may sue the defaulting buyer for the difference, known as the deficiency.
- Legal Fees: The defaulting buyer could also be held responsible for the seller’s legal fees, real estate agent fees, and carrying costs such as mortgage payments, utilities, and insurance from the original closing date to the date of the eventual sale.
Rising Interest Rates and the Risk of Failing to Close
With rising interest rates, buyers who initially qualified for a mortgage at a lower rate may find they no longer qualify for the same amount, putting them at risk of failing to close. It’s crucial for buyers to have a financing condition in their APS, which allows them to back out if they can’t secure the necessary financing.
Mitigating the Risks Of Failing to Close On An APS
To mitigate the risks of failing to close, buyers should obtain a mortgage pre-approval before signing an APS, including a rate hold that guarantees the interest rate for a certain period. They should also ensure they have sufficient funds to cover closing costs, which can run between 1.5% to 4% of the purchase price.
Conclusion
In conclusion, failing to close on a real estate APS can have significant consequences. However, with an experienced real estate lawyer performing due diligence and the right precautions, buyers can navigate the real estate market, even amidst rising interest rates.
