What are the Seller's Damages when the Buyer backs out of a Real Estate Contract?

"We have a deal" says the Sellers' real estate agent.

The contract is signed!  The Sellers are happy. The agents are happy. The lawyers are happy. The home inspector, the title and property insurance agents and even the moving company sales representatives are happy.  The problem, of course is deep down the Buyers are not happy.  What happens when this unhappiness turns into a deal breaker after the contract is signed?

The lakeside property in the Fingerlakes region of NY sold for the asking price of $1.725 million in June. Drainage problems were discovered on inspection. The parties negotiated a $10,000 credit to be given to the Buyers, but unhappiness reared its head and in July, they told the Sellers that they were cancelling the contract.  The Buyers leveled all sorts of accusations about whether the drainage problem was accurately disclosed by the Sellers. The Sellers, of course, were none too happy to receive this news and decidedly unhappy (to put it mildly) when in October, the contract was formally breached.

What do you think followed?

(Big surprise huh?)

The Sellers ultimately won their suit and proved the buyers had breached the contract.  The Sellers were entitled to damages but how much?  After all, they sold the property 2 years later to someone else at a price about $400,000 less than the contract price they had with the first Buyers. The Court had to determine how to measure the damages. 

Were the damages:

1. The difference between the contract price and the resale price that the Sellers received when they sold the property for 2 years later? or

2.  The difference between the contract price and the fair market value of the property when the Buyers breached the contract?

If you guessed No.2, you were right.  In White v. Farrell, the Court of Appeals stated:

The time-of-the-breach rule is longstanding in New York (as determining when to measure damages in a breach of contract case).  This rule is now (as of 2013 applied to real estate contracts)

What does this mean?

Well, in a market where the prices are fluctuating, this could mean a great deal. Expert testimony from real estate appraisers will be needed to determine what the value of the property was as of the date when the contract was breached.  This will require a hearing and more legal fees for both sides.

Litigation is neither fun nor inexpensive.  It is to be avoided.  Be very careful in choosing the right inspector to thoroughly examine the property you seek to purchase. You will want to know exactly what you are getting into.

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1. Was it the difference between the contract price

1.

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