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November 29th, 2011

What happens to a real estate contract if a buyer dies before closing?

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Whats Next 290Savvy homebuyers and their agents know to build in “contingency clauses” into real estate contracts–just in case something goes wrong.

But what happens to a real estate contract if the ultimate tragedy occurs and the buyer dies prior to the official closing or settlement?

Is the real estate deal just terminated entirely? Or is it possible that another party, such as a surviving relative, will be legally required to go through with the purchase? Also, what about any earnest money, deposit or other funds that may have been paid upfront; how is that money handled?

Can you get out of a home purchase contract?

While the average consumer might assume that a deal to purchase a home is instantly terminated upon a prospective buyer’s death, legal experts say that’s not actually how it works.

“As a legal matter, it isn’t necessarily the case that the contract is automatically terminated if a buyer dies,” says Ralph Holmen, Associate General Counsel for the National Association of Realtors.

“What happens will depend on the particulars of the contract, the other parties to it (particularly if there is a spouse who is also a party), and may also depend on the details of state law of the state to which the contract is subject,” Holmen says.

As a practical matter, however, it may be that sometimes the other party to the contract would treat the contract as terminated even if the law did not require it, Holmen adds.

Do you need a lawyer to buy a home?

Not all home sellers, though, are willing to cancel a sale–even in the wake of a buyer’s death. Some sellers may hang onto deposits or try to force the deceased buyer’s estate to go through with the purchase.

Ira Matetsky, an attorney with Ganfer & Shore LLP in New York City, has written about such a case. A woman had put $230,000 down on a $2.3 million Manhattan co-op but died before closing on the property. The seller refused to return the down payment to the deceased buyer’s relatives. The Manhattan Supreme Court ultimately sided with the seller, saying the deposit did not have to be returned.

Matetsky believes the seller won simply because there was no provision built into the contract stating that in the event of the buyer’s death the contract would be completely null and void.

The lesson: In addition to an appraisal, inspection and mortgage contingency clauses, buyers should also include a death contingency clause in real estate contracts.

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4 Responses to “What happens to a real estate contract if a buyer dies before closing?”

  1. Don McCoy Says: September 6th, 2012 at 4:45 pm

    Having just gone through an experience concerning this subject…I can not think of very many situations where it is just or moral for the Seller to keep the earnest money….perhaps it is legal however, the hardship of the Buyers loss and family most likely overshadows any need for the Seller to keep earnest money..

  2. Jennifer Says: October 9th, 2012 at 3:03 pm

    Legally speaking, in California, the contract is binding on the deceased’s heirs, or whoever inherits the property. However, in practice, most sellers agree to release the heirs from the contract, as a simple act of decency and compassion.

    Realtor, Laguna Woods

  3. AssureCLOSE Says: March 12th, 2013 at 11:46 am

    Please check out this new insurance product for the real estate industry. It covers all parties in the contract. Cost is very minimal and does cover sales up to $500,000 with no questions asked of the health of the buyers. All parties are covered – sellers, buyers, real estate agent and companies commissions and all parties on the closing statements that are due their payment on the statement at closing. A Buyer Option is available so that the surviving buyer is covered and the home is closed and the buyer owns their new home mortgage free. The sellers can go ahead and move and the buyer has a home that they can keep or sell. For more information and details on coverage http://www.AssureCLOSE.com or call the number on the website, 251-422-0321.

  4. Tim Manni Says: March 12th, 2013 at 3:35 pm

    Thanks everyone for your comments.
    -Tim (HSH)

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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