Updated: Sep 5, 2020
While it's rare that a buyer or seller will back out of the Option to Purchase (OTP), such cases can happen. This can be especially frustrating to real estate agents, as it means the undoing of a case you had considered closed - and if your client doesn't understand the implications, things can get emotional.
Here are a few things you can do when it happens:
First, a quick summary of the OTP and what it means
The OTP "reserves" the property for the buyer. Securing the OTP means usually putting down a non-refundable deposit of one per cent of the property price.
Once the OTP is secured, the seller is legally obliged not to sell the property to anyone else, for the duration of the OTP - most of the time, this is 14 days.
The buyer must exercise the OTP and buy the property (completing the Sale and Purchase Agreement) before the OTP expires - failure to do so means losing their deposit.
As such, you should always be sure to communicate this to your client from the very beginning. If your client is the seller, they must be clear that they want to sell - there are legal implications if they back out after getting the deposit.
If your client is the buyer, they must be certain they want to buy; otherwise they're throwing their money out the window with the deposit! All of this should be explained to your client in writing, not just verbally.
Nonetheless, if your client does decide to back out, here's what you should do:
Step 1: Explain the consequences to your client
If your client is the buyer, backing out after the OTP means they will likely lose the deposit. It's possible to plead with the seller to get it back, but the seller is under no obligation to return it.
(Most of the time, the seller will just tell you they have already used it for their next property purchase).
If your client is the seller, they must refund the deposit to the buyer (the OTP document will usually state how soon this must happen). If they fail to do so, they can be subject to legal action by the buyer. The buyer can take them to court to get the deposit amount back, or to compel them to go through with the sale.
As always, make sure these explanations are delivered in writing.
Step 2: Ask why your client is backing out of the OTP
If your client is the buyer:
Sometimes, the situation may be salvageable. For example:
Say your client secures the OTP, but then find they cannot secure a bank loan for the house*. You might try connecting them with various mortgage brokers, who can sometimes pull off last minute loans (e.g. a mortgage broker might be able to put them in touch with a non-banking Financial Institution, which is more flexible than a bank).
In another scenario, you're buyer's buyer may have backed out, causing a chain reaction. That is, the sale of your buyer's former home fell through, and they cannot get the proceeds in time to exercise the OTP.
There may be a solution to this. Consider approaching the seller and asking for an extension of the OTP - some sellers may accept this in return for some compensation (you will probably have to talk to the conveyancing firm about this).
You can also refer your clients to mortgage experts, who may be able to find solutions like bridging loans.
Finally, there may be some situations in which you have to accept there's no way out. An example is a drastic change of life issue, such as if your client is suddenly unable to work for medical reasons.
Another example is when carrying on with the purchase is such a bad idea, your client is better off forfeiting the deposit; such as if the unit turns out to be a resale flat targeted by loan sharks.
These are the among the worst situations to be in: clients might blame you for these, so always research every property in depth.
*This is why it's a good idea to advise your client to get Approval In Principle (AIP) before securing the OTP. There are even some agents who won't work with clients without AIP, as they want to avoid the panic of what can happen later.
If your client is the seller:
Some sellers may back out for straightforward reasons (e.g. they've found a buyer who is offering more, so they are happy to try and return the deposit and take on the new buyer).
In these cases, be sure to remind your client that the buyer can take legal action to enforce the sale based on the conditions agreed in the OTP.
Also, make sure your clients realise that it's impossible for them to do this in secret.
The buyer's lawyer would have to lodge a caveat in the Registry of Titles and the Registry of deeds. The buyer is thus notified of any third party interest in the property - including if the seller tries to sell to a third party.
Things can get much more expensive than just "returning the deposit", if the buyer then decides to try and compel the sale. This means hefty legal fees, and months of wasted time. If you can help your client understand this, they'll usually be able to do the math and realise it's not a good risk.
If the seller is dealing with non-financial issues, you may not be able to help. These are cases such as family disputes on whether to sell, or a last minute change-of-heart for sentimental reasons.
While this can be frustrating, it speaks well for you if you can try and empathise, and still do your best to help your client. This may involve speaking to the buyer, and convincing them not to go further than taking their deposit back.
Step 3: Create a timeline of everything that happened, and keep the supporting documents.
This is to ensure you don't get blamed for any miscommunications, such as "not informing" your client that the OTP was about to lapse.
It also provides you with supporting evidence, in case any unfair complaints are raised about you to your agency or the regulators.
Step 4: If you continue to help your client sell or find a new home, take stock of the situation to prevent a repeat scenario.
If your client has just forfeited the OTP for reasons like loan approval, it's best to have these issues settled before even looking at the next house. This may also involve recalculating what your client can afford, before further viewings.
If your client is the seller, consider if they're in a position where they can be helped. If they're simply too hesitant and don't really know if they want to sell, then it may be best to give them some time and come back later - working with hesitant sellers can be a draining, drama-fraught experience with no absolutely right approach.
Sometimes, it is outside our control and we must know when to allow time to pass for situations to resolve themselves.
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Stuart Chng, Senior Associate Executive Director of OrangeTee & Tie, is a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
Professionally, he is a licensed real estate agent, investor, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications. Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.