There are rules, there are legal opinions and legal reality, but in the end there is the set of facts. Regardless of the rules and what you state in your contract, the question any good buyer's attorney is going to explore is whether you have sufficient knowledge and experience to have known that the buyer could not buy the home using an FHA loan. The buyer's attorney is going to try to prove you are a sophisticated business person who knows enough about flipping homes to have known that the FHA anti-flipping provisions would prevent any buyer from using an FHA loan. If he succeeds, no court, whether jury or judge is going to look kindly upon you. Instead, it will look at you as a predator who took money from a buyer when you knew he could not compete the deal. In short, they'll see you as a thief taking advantage of a ignorant person to steal his hard earned money and prevent him from being able to own a home. Do you really want to maintain your position when you are faced with such a probable outcome?
Now, your statements in your question are basically admissions that you know the legal concept of "constructive notice" and you relied upon that to protect you from having to disclose that you had the property for too short a time for an FHA loan to be able to be used for the property. It appears from your statements that you had knowledge of the material fact that you had too short a time in the home to allow an FHA loan to succeed in the purchase. (Your agent certainly should have had such knowledge and had a duty to advise you of such result. If you are a realtor, you have a duty to know such things and disclose them to the buyer and seller.) Constructive notice is no substitute for disclosure of a material fact within your personal knowledge when holding out a home for sale as a principle dwelling in California. By accepting an FHA loan you are stating you know that the home is going to be used as a principle dwelling. Also, the contract itself most probably probably stated on it that the buyer was intending to occupy the dwelling as his principle residence.
By misleading a buyer that he can purchase a home with an FHA loan and accepting his deposit when you know you have flipped the home within too short a time for an FHA loan to be able to be used, and relying upon the sales contract to keep his money sure looks like you knew that you, in the end would keep is money and keep the house. It looks like your only intention was not to sell the house but keep his money. Don't you think that makes you look like a thief by committing fraud? Are you aware of the civil penalties for fraud and criminal penalties for fraud? Well, stay your course, keep the money and you may find out!
Sure, you may "win" or you may not, but why take the risk? The legal fees necessary to defend yourself and prove your point, if you actually have a winning point will be far more than the deposit.
Words to the wise,
Are you selling this property yourself or do you have your property listed with a REALTOR?
If you have your property listed with a REALTOR, then answer the question the question: what does your REALTOR say?
However, from the sound of your question, it sounds as if you are trying to sell the property yourself without a REALTOR.
In that case:
As the others pointed out, your question is a legal question.
We as REALTORS are not permitted to answer legal questions.
I recommend that you hire an Attorney if you want to try to keep the buyer's deposit. If you are determined to keep the buyer's deposit, that is not something that you can do successfully on your own, without an Attorney.
The Attorney that I recommend is Ron Rossi. You can reach Mr. Rossi at: (408) 261-4252.
If you want to avoid a legal dispute, I recommend that you sign the papers to return the buyer's deposit, in exchange for a written release from the buyer, so that you can put the property back on the market.
You cannot sell the property without a written release from the buyer. .
If you refuse to sign the papers to return the buyer's deposit, then I can guarantee you that you will have a legal dispute with the buyer and the buyer's agent and you will not be able to sell the property until the legal dispute is resolved.
It could easily take 6 months to a year or more to resolve that legal dispute. During that time, you must make your mortgage payments, tax payments and insurance payments on the property. Your legal dispute could end up costing you a large amount of money both in legal fees and costs to hold the property.
The costs to you will probably be far more than the amount of the buyer's deposit.
Fortunately, if the property is located here in San Jose, we are in the midst of a rapidly rising seller's market. You can put the property back on the market and you will probably sell the property within a matter of days for more money than the original price that you accepted.
I recommend that you sign the papers to return the buyer's deposit in exchange for a written release from the buyer so that you can put the property back on the market immediately.
Charles Butterfield MBA
Real Estate Broker/REALTOR
Cell Phone: (408)509-6218
Email Address: firstname.lastname@example.org
Obviously the buyer had no idea this was an issue as you say you did not either.
Why not just give the relatively small amount to you, the investor back to the buyer who is most likely missing this large amount of money and can not move on with out it. You, on the other hand, can as you still have the home to sell. What are you trying to gain beside a few thousand dollars and some very bad karma. Even in business what goes around comes around.
The right thing is to give the buyers back their deposit. Soon.
I've thought even more about your predicament. The anti-flipping rules are designed to apply to transfers of property for profit, and your situation may be that at least one of the transfers was due to some other extenuating circumstance. In such case, you may have very strong legal standing in court. However, you as one with money vs a plaintiff without money, the court will have sympathy for the plaintiff. In such situations truth sometimes falls by the wayside and the court awards the little guy either as judge or jury because they want to and uses any excuse it can to justify that result.
Having received a call from an attorney, and possible insults from insinuations against your character that often comes with such calls, you may feel, well with THAT attitude, go pound sand, I can stand on my rights and your client was given everything they were supposed to. They should be mature enough to know their risks BEFORE they make a commitment." For a good person who plays by the rules, it certainly seems fair the buyer should to. Once an attorney has entered the picture and thrown insults or mud or insinuations, the person experiencing such would want to react with "You want to play attack my face? By the time I'm done with you the only thing left of your face will be the bones!" (At least that is how I felt in a previous circumstance.)
But now, you are in a position that you can be magnanimous IN SPITE of the attorney and return the deposit simply because it helps someone, who by virtue of the fact that they needed to use an FHA loan, needs such help. Your reputation in the community will be enhanced. People will see your true character by such an act. Your feelings about yourself will be verified by the kindness of your actions.
I wish you the best outcome and a better profit when you put the house back on the market.
I want to be clear about my previous answer. I don't want you to feel I am accusing you of fraud, because I am not. I'm just trying to show how a good buyer's attorney will approach your dispute and how distasteful he or she can make your experience if he succeeds.
Mr. Varghese has an excellent point. If the buyer did not remove the loan contingency, then you should give the buyer back the deposit. The way we usually use the 17 day time limit on the contingency is to give the buyer a time in which to act. If the buyer does not act within that time, we send a notice to perform. If the notice to perform is not responded to by either seeking an extension or removing the contingency, then we talk about keeping the deposit.
At any rate, Mr. Butterfield gives you some upside reasons to return the deposit and make more money on the sale of the home to a new buyer. Assuming you are in the SF Bay area or Silicon Valley, you'll make more money from the sale after returning the deposit than you would if you keep the deposit and have to deal with a dispute.
Part of representing sellers is our duty to protect them. I suggest, given your recent experience, that you use a realtor to sell your property. You'll be able to sleep soundly.
If you have questions you want to pose offline, feel free to call me at 408-639-0211.
It sounds like you may have a very complicated transaction here. I would highly recommend that you contact a good Real Estate Attorney for an opinion of your rights. I don't think we can answer this one for you through this forum.
Realty World/Blue Property Group
Kind regards ~ Andrea Wince ~ RE eBroker Inc. ~ Lic. 01439761