Understanding the Contract
Understanding the contract and common addenda is critical as a listing agent because they are so heavily weighted in the buyer's favor. Since real estate is such a large purchase, it makes sense that buyers have the ability to review every aspect of the property, and as such, they have many opportunities to terminate and receive their earnest money refunded. It's important that you understand all review periods, provide as many required documents up front as possible, and communicate to your clients the consequences of delaying any documents.
Highly encourage every agent to buy this book and take this class. This is the fastest way to develop a deep understanding of the most important document in your business!
Buyer Out #1: The Option Period
The option period is the most common (and commonly understood) buyer review period. Its wonderful in its simplicity. The buyer can terminate for any reason during the option period and only lose their option fee. Most agents focus on the length of the option period. What many agents miss is the day the option period expires. We always like to list properties on Wednesday or Thursday and we like to re-list properties on the same days. If a 7 day option period expires on Wednesday, there is no benefit to shortening that to 3-5 days and little downside to extending it to 8 days. There is significant downside to extending the period to 9-10 days
Buyer Out #2: The HOA Review Period
It's an inside joke among industry veterans that "Why do we even bother with an option period when there is an HOA?" The HOA review period allows the buyer to terminate without providing any reason other than "terminating under the HOA addendum." After all documents are delivered, the buyer has a 3 day review period under the 1-4 Family addendum and a 6 day review period under the Condo Contract. Docs are usually delivered on the second or third week after contract, so this is a relatively long contractual out.
Buyer Out #3: Third Party Financing Addendum
Most purchases are financed and include a Third Party Financing Addendum. In a normal market, most buyers include a protection period for credit approval. During this period, it's incredibly easy for a buyer to back out of a contract. They simply provide notice that they have not received approval and they're contractually due their earnest money in refund. Since it usually takes ~3 weeks to receive underwritten approval, buyers can typically terminate during this period with no repurcussions.
Buyer Out #4: Survey / Title Review Period
The survey and title review period allows the buyer to terminate for many reasons, but they are required to object to a specific item and there is a period during which the seller can cure the objection. The contract does stipulate that commonly found items on the survey (like utility easements) may not be objected to. However, most surveys and title commitments do show exceptions or easements not listed as an excluded objection. It's important to note the days written into this paragraph, as this is the review period. There is little to no reason to have a long review period here.
Buyer Out #5: Release of Earnest Money (and Liability) Leverage
Most agents focus on the Release of Earnest Money and ignore the more impactful function of this form: Release of Liability. Residential contracts don't automatically terminate on any date (most agents assume they terminate after the closing date.) If a buyer has not provided a Notice of Termination, you have an active contract until the Release of Earnest Money is signed. Even with a Notice of Termination, you have an exception to title until the Release of Earnest Money is signed. If your seller goes under contract again prior to signing the Release of Earnest Money with the first buyer, they will have to negotiate the Release of Earnest Money with the first buyer. That buyer can potentially negotiate a settlement over and above the original earnest money (and we have real examples of this happening.) If your seller is motivated to sell their property with the least amount of hassle, it's critical that they negotiate and sign the Release of Earnest Money prior to re-listing the property.
Other Contractual Outs & Speeding Tickets
We've listed the most common contractual outs here, but buyers (and buyers agents) are creative! There are certainly examples of buyers demanding their earnest money for other reasons (and up to the day of closing.) Buyers and buyers agents know and understand the spirit of the contract, but when thousands of dollars are on the line, many people can justify borderline (or outright) dishonest actions. Just like many people fight speeding tickets they know without a doubt that they're guilty of, many people will bend or break honesty boundaries in order to save thousands of dollars.