Property Buyer Wants to Back Out after the OTP. What Do I Do Now?

Can a buyer back out of option to purchase otp? what to do?
Find out what options are available to you and your client.

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:

back out of option to purchase
Remind them on the consequences of reneging on the Option to Purchase

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.

Find out the reasons for backing out of the OTP. The buyer could be misinformed or unaware of other possible options.
Find out the reasons for backing out of the OTP. The buyer could be misinformed or unaware of other possible options.

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.