Closing Late on a Home Purchase in the Bay Area: What You Need to Know

When purchasing a home in the Bay Area, timely closing is crucial. However, delays can happen, and understanding the implications and processes involved when closing late can help both buyers and sellers navigate this situation smoothly. In this article, I explore extension of time requests for contingencies, extension of time to close escrow, seller’s remedies to enforce timely closing, and the seller’s ability to cancel the contract if the buyer does not close on time.

Extension of Time Requests for Contingencies

Many purchase agreements have one or more contingencies in place, each of which will have a date by which they are due to be released.  It is very common that when a sale closes late in the Bay Area, the buyer will first have requested an extension on the time for one or more of these contingencies.

Contingencies are conditions that must be met for a real estate transaction to proceed. Common contingencies include financing, home inspections, and appraisals. There may be other contingencies as well, such as for the sale of the buyer’s current home, or the seller’s ability to find and close on a replacement property. If these contingencies are not satisfied by the agreed-upon dates, a buyer (or seller) can request an extension of time.

To request an extension on a contingency, the buyer must submit a written request for an extension to the seller.  This “Extension of Time Addendum” (ETA) is a simple document that simply specifies how much more time will be added to the contingency period in question.  This form does not ask why the extension is needed or attempt to justify it in any way, it simply sets a new date by which the contingency must be released.

Of course, an agent wouldn’t simply have their client sign this document and email it over to the other agent for signature.  Best practices (and working in good faith) would mean that in advance of the contingency release deadline, the agent would communicate to the other side of the transaction that it appears as though an extension will be necessary, and why.  This way, it won’t be any surprise to the agent (or their client) that the extension is requested.  By being open and transparent about any delays, the other party will be much more likely to agree to an extension of time.

Once the seller receives the extension of time addendum, they can either accept, negotiate different terms – or simply do nothing. If accepted, both parties sign the addendum, amending the original contract.

There is no mechanism to reject the extension of time addendum par se.  If a seller wants to reject a buyer’s request to extend a contingency period, the seller would need to issue a notice to buyer to perform – which gives the buyer two days to release the applicable contingency (assuming the contingency release date is not more than 2 days in the future), or empowers the seller to unilaterally cancel the contract.  This can be considered a de-facto rejection of the buyer’s request to extend the contingency period.

However, rather than issuing a notice to perform (which may have unintended consequences, such as upsetting a nervous buyer who then, under pressure, decides they want to cancel the contract), a seller may instead opt to simply do nothing – neither accept the extension request, nor issue a notice to perform. The seller can simply wait, communicating to the buyer through the agents that at this point, the seller wants to see that the buyer continues to work in good faith to release the contingency before agreeing to any extension. Then, if it seems the buyer is not making progress, the seller can issue the notice to perform when it becomes apparent that the buyer may not be able to perform (release the contingency).

Hate to wait?

Extension of Time to Close Escrow

Closing escrow means finalizing the sale and transferring ownership from the seller to the buyer. If unforeseen circumstances cause delays, the buyer may need additional time to close escrow.  To request an extension of time to close escrow, the buyer would use the same form as to request an extension on a contingency period – the extension of time addendum.

When a buyer requests to extend the close of escrow, it should be handled the same way as a request to extend a contingency:  the buyer’s agent should be in contact with the seller’s agent well before an extension is requested, keeping them apprised of the buyer’s progress and what issues may be necessitating an extension request.  The seller is then free to accept the buyer’s request, do nothing (while waiting to see if the buyer is continuing to make progress on closing), or issue a demand to close escrow.

Demand to Close Escrow

If the buyer still fails to close, the seller can issue a “Demand to Close Escrow,” typically giving the buyer three days to complete the transaction. This step underscores the seller’s seriousness and puts pressure on the buyer to act promptly.  After having issued the buyer a demand to close escrow (and waiting the mandatory three days), the seller may then move to unilaterally cancel the contract.

Or not.  The demand to close escrow is not the same as a cancellation of contract.  It simply gives the seller the contractual means necessary to cancel the contract when they feel they must.  This puts the buyer under a lot of pressure, knowing that the seller can then cancel at any moment

To be honest, in 21+ years in the real estate business, I think I have only issued a demand to close escrow once or twice.  What typically happens before this becomes necessary is that the buyer will ask to be let out of the contract (which is easy, while they have contingencies still in place).  But should it become necessary, this demand to close escrow is the mechanism to force the buyer to close, on pain of cancellation (and risk of the earnest money deposit).

Extending the Closing Date

More often than not, a seller will agree to a buyers’ request to extend the closing date – at least once, possibly twice, and sometimes even three times or more.  It’s possible to extend a contract more or less indefinitely.  The buyer may have an issue with losing their loan rate lock, but they can pay to extend it.

Many sellers are surprised to find that there is no financial penalty built into the contract for the buyer’s need to delay closing – even though this could be very costly for the seller, as they will continue to need to pay taxes, insurance, upkeep, utilities, and quite possibly a mortgage payment as well.  However, the seller can add their own financial bite in exchange for extending the closing date.

I personally favor having the buyer immediately transfer all (or at least a good portion) of the buyer’s earnest money deposit to the seller through escrow.  If the buyer is so sure they’re going to close, after all, why not just fork over the earnest money deposit now?  This is a good strategy because in the event of a buyer default, it is actually hard to collect the earnest money deposit, even if the seller is entitled to keep them per the contract.

Another option is to charge the buyer a per-diem fee for an extension.  This is common on some kinds of contracts (e.g. the purchase of bank-owned “REO” property) but can also be done with any sale.  There is an issue that charging these additional fees may require that the buyer be issued a new mortgage closing disclosure (which by law they must have 3 days to review before signing loan documents), so if the buyer is requesting only a brief delay to closing, this will often be a counter-productive strategy.

The seller might also negotiate to increase the sale price, extract a longer free rent back, or make any other changes to the terms of the contract when the buyer requests to extend a contingency period or the closing date.  A seller should not feel that they are held hostage; they usually hold much more leverage than the buyer does.

For Best Results

Returning the Earnest Money Deposit

If the contract does end up falling apart due to failure to release a contingency or close escrow, depending on the contract terms, the seller may keep the buyer’s earnest money deposit as liquidated damages for the buyer’s failure to close. However, this is subject to state laws and the specific terms outlined in the purchase agreement.

In all my 21+ years, I have only seen a very small handful of times when a seller has been able to keep a buyer’s earnest money deposit.  This is because even though the contract specifies that the seller may keep the deposit, separate signed escrow instructions are required to actually transfer the deposit to the seller.  A buyer may refuse to sign those instructions, and could in fact threaten to sue the seller over the earnest money deposit, potentially creating a “cloud on title” which would inhibit the seller’s ability to sell the property to another buyer.

This is one reason why it is a good idea to get the buyer to release the earnest money deposit to the seller for any request to extend escrow.  If the buyer is unwilling to do so, it indicates that they are not very confident in their ability to close, and it may be in the seller’s best interest to cancel as soon a possible.

Conclusion

Closing late on a home purchase in the Bay Area can lead to complications, but understanding the processes and remedies involved can help both buyers and sellers manage the situation effectively. Clear communication, timely extension requests, and adherence to contractual obligations are key to navigating delays and ensuring a successful transaction. If you’re facing a potential late closing, consult with your real estate agent or attorney to understand your rights and options fully.

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