In the last few months, I have had three incidents of buyers defaulting on purchasing my listings. In each case there was an earnest money deposit held in escrow at a title company.
Case #1: Buyer defaulted because he said he did not want to own three properties.
Case #2: Buyer defaulted because he wanted to pay $10,000 less than the contract price the day before closing.
Case #3: Buyer defaulted because he found a new home he wanted to buy instead of my listing.
There was no provision in any of the contracts that stated, “Buyer may decide to cancel the contract at any time for any reason with no penalty".
In the first two cases, the buyers’ agents told me they informed their buyers they would probably lose their deposit. It was clear that there was no contingency allowing the buyer to walk away, and the buyers knew that.
In Case #3, however, the buyer’s agent became an advocate and
demanded the buyer’s deposit back. He knew my seller was contacting an attorney, as he had called the buyers directly to inform them. The agent stated that although the buyers did not want to complete the purchase, they were worried about my seller’s legal intentions. He said they could dig for another provision and get back their deposit later. He defended them and asked what we could do to resolve the matter. I told him I was not an attorney, and would not argue back. You see, I don’t mind negotiating price and terms for the sale of real estate...
But I certainly don’t negotiate about someone’s legal rights in keeping deposits.
Do you?
It's Wendy!
Wendy Rulnick, Broker, CRP, CRS, GRI, ABR Rulnick Realty, Inc.
Destin Short Sales & Pre Foreclosure Help.
www.ShortSaleSuperstars.com for agents
Call toll-free 1-877-ITS-WNDY (1-877-487-9639) or local 850-650-7883 ext 204
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Call Wendy Rulnick, Broker/Owner,to list and sell your home or condo on the Emerald Coast of Florida in Walton, Okaloosa and Santa Rosa County- Destin, Santa Rosa Beach, Fort Walton Beach, Niceville, Bluewater Bay, Navarre, Seagrove Beach, Watercolor, Sandestin, Seaside, Crestview, Rosemary Beach, Mary Esther, Shalimar, Eglin AFB, Hurlburt Field. Wendy is a short sale and pre-foreclosure specialist and has been featured in "Kiplinger Personal Finance Magazine" and "Florida Realtor Magazine".
We obviously can't practice law without a license. However, I recently had a buyer who defaulted, and I duly communicated the buyer's desires regarding the deposit to the sellers' agent.
I am with you Wendy. Asking for the return of the earnest money is one thing but beyond that is a sticky wicket. In my state we use option money for at least a limited amount of wiggle room.
For what reason would an agent wish to get involved in that mess? SC has a great method of settling disputes. The earnest money cannot be returned by the agency holding it until a form is signed by both principals. Without that the 'case' goes to a magistrate for resolution.
I would simply tell the buyers to find another agent as I do not work with those that do not honor a contract.
John Serving the NC & SC coasts.
www.rakoci.com
Wendy, when it comes to getting down and dirty about earnest money deposits, I'm with you. Get out of the way and let the buyers and sellers and their lawyers duke it out.
Brian - I think that is all we can do.
Edward - Interesting, I am not familiar with "option money".
John - It is dangerous territory to get involved with, that's for sure.
Patricia - I agree.
Rule # 1. Ask the BROKER what they want to do
Rule # 2. Do what the broker says.
Rule # 3. When in doubt, see rule # 1.
Hee hee that is a good one, Ron... :) (Plus I am Da Broker)
Just had something similiar happen with an associate - it was made very clear to the buyer that the buyer was going to need to seek legal advice from an attorney regarding the earnest money. It was quite clear in the contract what happened if the contract was breached who was getting what. Not going to get into that battle. If both parties do not sign off on the rescission in agreement with regards to who gets the earnest money -escrow will not release it and at that point -the buyer and seller need to speak to attorneys. ugly topic that we do not get into the middle of! but good post!
Wendy I have to say I really like your posts. (I like common sense) :)
Option money is simply $$ put up by a buyer to bind the seller from selling to another during the option period. It's NOT refundable generally (YMMV ~ Edward, in your state is it?)
In NONE of the instances you cited is the buyer defensible IMO--provided the contract's inspection/due diligence period is over and unless the specific is contractually agreed to - and what seller in right mind would agree to the deal 'as long as they don't find another house they like better' etc.
Even during an inspection period, the buyer needs to find something they 'reasonably disapprove of' about THE PROPERTY - and I don't think any of those items would apply.
A deal is not 'a deal unless I change my mind' -- A DEAL'S A DEAL.
Wendy: When in doubt, read the contract. I am guessing that if there was a financing contingency, that would have taken care of answering the question. If not... the buyer needs to know that they signed a CONTRACT... and that "earnest" money is just that. It is given to show that the buyer is "earnest" about what they are doing. If the buyer wants to default... that is their choice. Whether they get their earnest money back... is NOT their choice.
Valerie - My thoughts, exactly!
Candice - Thank you on the compliment and comments!
Karen - Some of the buyers feel entitled to just change their minds.
Wendy, sorry you had to deal with this. I'm with Patricia...I prefer to get out of the way. I can relay my client's message to the listing agent, but do not feel the need to "defend" them when they are obviously not upholding their end of the contract.
Wendy: A buyer CAN change their mind. They just need to know that doing that puts them in violation of the contract they signed and agreed to, and in so doing, they have to be prepared for the consequences. One of which will probably be forfeiting their earnest money.
Lina - I agree, relay.... that's it.
Karen - Yes, exactly. I should have elaborated on my reply to you, tired today! :)
Wendy, I have a post to write about this one. An agent, who was also the buyer, defaulted...and then took the seller to District court to get the EMD returned. Case was dismissed.... seller will be taking agent to the REC. Another post..another time.
Here's my take: On a short sale, the purchase contract is between the seller and buyer. If the contract completed, the seller could have not financially benefit from the sale of the property. The money can't go to the foreclosing lender nor can it go to the seller. By my logic, the security deposit goes back to the buyer as the seller is not entitled to any proceeds from a property that lacks equity. This, of course, is my opinion. It would be interesting to get the opinion of a real estate lawyer who specializes in short sales and contract law.
From the "I don't want to if I don't have to school"....and you must have been raised all wrong to be responsible...grrr...we have that same buyer who knew just what they had to do at the last minute to be disqualified from buying the property. In Wisconsin, we are required to send a cancellation and mutual releae to the seller ...it was sent without the signatures ever returned. We called the listing agent...the sellers, to my mind, as they should, are in consultation with their attorney. In Wisconsin, you can't put the home back on the market without the signed cancellation...the cancellation agrees to all or part or none of the earnest money returned or not returned...that is the the law...if there is a way around that...it would be a court decision. No realtor from another state (or planet) should offer advice on what someone should/could/would do when they are not in the state...not a lawyer and not qualified...but we see it every day in the rain.
Wow...I've had clients who've wanted to walk away from a contract and have. But I advised them to speak with an attorney, and I did nothing until they came up with a strategy.
WENDY,
I think we are experiencing the high volume of agents that entered the industry during the "hey-day." and the "free for all" the industry was in. Many, many, many ,many agents learned to cut corners at every turn and didn't fully appreciate the seriousness of advising and preparing these documents. I'm sure there are agents not advising their clients the proper way and giving them "bad" interpretations of the buying process.
All our Short Sale needs to close and deposits held with OUR title co. When something like this pops up they will need to address the issue of getting their deposit back with them. Needless to say, it will not happen without due process. I don't get into the fight.
The really bad part of this is how it can push a family into foreclosure after they were so close to solving their issue. That is the part that really irks me.
Margaret - That is unbelievable, cannot wait to read your story!
Satar - That is an interesting point of discussion. I would say, however, the earnest monies would not be from the sale of the property, but from a separate matter. That matter is that the seller was "harmed" by removing the property from the market.
Sally & David - What prompted me to write was my shock at the agent becoming an attorney for her buyer's deposit, bad news.
Laura - Yes, I don't even want to be involved in the strategy.
Sidney - I agree, it is horrible when a buyer defaults on a short sale, then the seller is perhaps three months closer to the courthouse steps!!
Yeah, I thought about that as well. I asked myself what harm did the seller encounter. The only thing I can think of is his/her harm could be a greater risk of foreclosure. My conclusion is that a short sale is not a guarantee nor is it a right to relief of equity, therefore the innate nature of a short sale alone, does not entitle a seller to any monies from the transaction. The purchase offer between buyer and seller is contingent upon lien holder approval. Lien holder approval is contingent upon the seller not receiving any funds from the transaction. So whether or not the transaction took place after lien holder approval, the seller is not to benefit from the opportunity/privilege of having a short sale conducted. Maybe I picked the wrong week to give up drinking, but I cannot see how a seller can benefit on the real estate transaction itself where the seller was already without equity and in harm's way. Oh well...where's Mr. Owl when you need him! ;)
SATAR,
You are confusing two different things entirely. Once a Short Sale is approved the Lender can restrain the Seller from receiving any funds due to the sale. When a buyer walks and doesn't close the deposit can be claimed by the Seller. The Lender is not party to the CONTRACT and therefore the Lender has no say on anything outside a sale of the property.
Everyone needs to keep track of who is in fact the owner of the property and not bow to perception of the Lenders being in charge of everything.
Thanks Sidney. I actually agree and can see the logic behind your statement. Just throwing out a thought and expressing my opinion. It would be interesting to see if in Wendy's situation on buyer #3 as to what the legal argument would be for and against the buyer getting their deposit back.
Well... we don't defend (that is the area for the attorney's) but we do advocate on their behalf in certain situations. This is clearly an area that each state is going to be distinctly different. For California, we do have an "inspection, due diligence period", that typically will run up to 17 days. It is the time period for the buyer to complete their inspections and received & review their disclosures. At the end they confirm they are as comfortable with their decision then as they were when they wrote the offer. There is a whole formal proces that we are required to go through to confirm it has happened. If buyer's just change their mind for whatever reason after that time - I am just generally very relieve that escrow holds that deposit until such time as the buyer and seller can come to some agreement.
Cathy - Ooohhh I'd be careful other than just relaying requests. I don't hold deposits at my company, either, and the convulated procedure about resolving disputes in Florida is part of the reason.
I could have stated that much better. When we represent a buyer and they decide to leave the transaction and want their deposit - we are the ones relaying that request to the seller through their agent. There is usually a phone call or email to provide a courtesy notice - than we followup with the formal cancellation notice. That request, of course, is delivered with the intent of getting the money back for the buyer EVEN if my personal opinion differs from my client. Past that, if the seller takes a position of refusal - that deposit just sits in escrow (thank goodness) until the parties work it out. Thank you for catching that.
Short sales do pose a new set of problems - if the buyer can't reach a binding agreement without 3rd party approval when does the exit door really close
A buyer wanting to buy another home ... sounds like he's forfeiting his deposit to me. Hard to say without reading the contract, of course, but I would say he must want that other home bad enough to pay to have it. That, after all, is what Earnest Money Deposits are for. Good luck
Patricia, John made an earlier explanation of SC law. Mine in Pa is the same. That said as a buyers agent I believe I can state my clients case to the sellers agent on certain grounds. I believe that is appropriate only when the issue is covered under the contract. Mortgage contingency, inspection contingency, appraisal, or insurance contingency. The remedies for the parties under those contingencies is clearly defined in the contract. Therefore, I am only acting as parrot, not giving legal advice or opinion.
The three examples you gave are not covered under the contract. The buyers agent might be creating a further legal liability for the buyer by engaging in any discussion with the sellers side. If I was faced with a buyer backing out for no good reason I'd let my broker handle it.
I realize in this case you are the broker. In my opinion the best course of action is to inform the buyer they may not be able to recover their escrow, but only an attorney could advise them. I'd tell them to seek counsel and take the appropriate action per their legal adviser.
Bonnie - I love your "parrot" expression. Absolutey, seek legal advice.... Wendy
Cathy - Thanks for commenting further.
Eric - If it is within the allowable time frame, it is contract contingency like the others.
Jim - Cavalier buyers' attitudes lately.