Short Sale (1) - How to handle Earnest Money when Sale fell through at Last Minute due to Loan Fell Thru?

Asked by Sylvia Barry, MAS,CIPS,SRES, Marin, CA Sat Aug 25, 2007

Short Sale seems to be a hot topic now due to the misfortunate of the sellers but with a lot of allure to buyers and realtors (whether they get into the short sale business by default or by design). The question I have is “what is the common practice in your area when you write up an offer about what to do with deposit if the buyers removed all contingency including loan contingency and then the loan fell through because of loan condition chanegd due to the extra long escrow period and the loan condition changed dur to no fault the buyer after the loan contingency is removed.” This is to address the contract before making an offer NOT after fell through. How do you protect your client? Both Seller or Buyer?

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#1, , San Francisco Bay Area
Sat Aug 25, 2007
There isn't really any common practice in this instance. If there is no written provision in the purchase agreement specifically addressing what happens to the deposit in the event the deal falls through whether is is the buyers fault or due to no fault of the buyer, it is pretty much up for grabs. Whatever is agreed to between buyer and seller.

By this point, however, there are charges in the escrow for appraisal, inspections, etc. The purchase agreement normally specifies who is responsible to pay these fees but if the deal falls apart, the buyer and seller must agree who will pay for these fees which are costs already incured.

We are in a market where lenders are changing their underwriting guidelines in mid-stream and it is becoming a more common occurance for deals to fall out because a lender first approves a buyer and comes back in the 11th hour to inform the buyer that due to changes in underwriting guidelines the buyer must come up with an additional 10% downpayment to close the deal.

If a seller is unwilling to release the deposit back to the buyer, I suggest to the sellers that they move on to the next buyer and not tie up the deposit in the current escrow. The inspections will be necessary in a sale with subsequent buyers anyway and the sellers can ask the next buyer to reimburse the seller for inspection fees. It gets sticky if the seller is not in a position to pay for the inspection fees.

I t is important to address this point up front in the contract so the buyers are made aware from the get-go that there is risk of losing part of their deposit if the deal goes south.

Great question. I am interest in hearing more responses to this questtion.
2 votes
Bridgette Ko…, , Florida
Sat Aug 25, 2007
Great question! I don't think I can expound any further upon Ed's excellent answer. My comment:
addendums, addendums, addendums! Write one for every nightmarish scenario you can think of; be sure to include a remedy and a disposition for funds. I'm sure we'll be hearing more on this topic--I'll be listening!
1 vote
Sylvia Barry,…, Agent, Marin, CA
Sat Aug 25, 2007
This agent does a lot of busienss in Sonoma and pretty well known; so I am assuming she knows what she is talking about. Whether her numbers are all correct, I am not sure. However, 1%, 2% is pretty common.; and for a $700,000 properties, you will be looking at potentially losing $21,000 rather than $10,000.; and this should really not happen that much, knock on wood.

Although I think you can substitute $10,000 or even the 1%, or 2% with some other number that's acceptable to both sides will probably work.

I think it's all in the negotiation. This is just an interesting concept.

Other agents said that they are advising their clients to get two loans, one for backup.

0 votes
Bridgette Ko…, , Florida
Sat Aug 25, 2007
WHOA! As I was reading your last post, I was nodding: uhuh, uhuh, sounds good; but then the seller gets to keep the $10K to compensate for time off the market? That sound very steep! How about instead "X amount" of dollars for each month off the market? Is that doable?
0 votes
Sylvia Barry,…, Agent, Marin, CA
Sat Aug 25, 2007
I brought up this question because there was a discussion about this at our Broker Open House meeting (all the agents from various brokerages meet before Broker Open Tour to pitch new properties) this past Thursday.

The discussion was short because the forum is really to pitch properties not discuss issues, so we did not have time for detailed discussion - meaning, please don't ask me all the details about what I describe below -

CAR has a new Short Sale Listing Addendum out; we discussed that a bit.

One of the agent from Sonoma County (just north of Marin County) said that they are having a lot of short sales now up there, and they do have a common practice in place. Sounds like they have tightened up the offering and escrow process a lot in Sonoma due to all the lending problems and short sales. (To clarify - Sonoma County is a very different market than Marin County.)

Anyway, what she said was that they collect the customary 1% initial deposit and then 2% increased deposit upon removal of all contingencies; they also have another $10,000 (her figure for this case) set aside for this, however they do it. They then have an addendum specifically state that if the loan falls through due to no fault of the buyer but it's from unforeseen lender issues after all contingencies are removed; the buyer will get all deposits back and but the seller get to keep the $10,000 to compensate for the time when the house is off market.

She emphasized that the approach and Pros and Cons are explained clearly with both the sellers and the buyers; and it's acceptable for both.

Please don't ask me all details about this deal though, as I don't know. But I thought the concept is worth sharing.

This can actually be applied to all offers as not only offers with short sales have loans fall through due to lender changing criteria at the last minute.

0 votes
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