Expert: Todd C. Menard - 1/23/2008

Question
Is a good faith deposit($8,000) REFUNDABLE?  THE BUYER HAD THE HOUSE
OFF THE MARKET FOR 3 1/2 MONTHS STATING THEY WERE PREAPPROVED FOR THE
HOUSE- MADE US PUT MORE ADD ONS TO THE PROPERTY AND NOW THET BACKED OUT
BECAUSE THE CAN NOT GET THE LOAN NOW EVEN WITH A COBORROW!!! NOW THEY
SAID SORRY GIVE US BACK THE DEPOSIT


Answer
Hello Gina -

Probably not.

Good Faith Deposits (AKA Earnest Money) are amounts of money pledged by the buyer to satisfy the damages due a seller in the event the buyer causes a breach of contract or ultimately fails to purchase subject to and contingent upon 'contingencies' in the contract. of course the seller could opt not to accept the earnest as damages and use mediation first in an attempt to receive more money in damages than the earnest would have provided. Of course this is a more lengthy process. In Arizona this is indicated on Line 277 of the AAR Residential Real Estate Purchase Contract.

A 'Contingency' is defined in AZ as something that must occur before the party is required to perform under the terms of the contract. Therefore, if a contingent item is not met then the party is not obligated to perform under the real estate purchase contract and would be entitled to reimbursement of the good faith deposit/earnest money deposit.

I usually train students in Seller Representation classes to accelerate the terms of loan approval to within the 10-day inspection period and to accomplish this in this timely a period is actually possible. If necessary an extension to this could always be granted mutually between the seller and buyer but it certainly requires immediate diligence and results on behalf of the buyer and buyers lender.

The buyer is required to diligently seek the specific financing and terms indicated on the financing portion of the real estate purchase contract. A seller is provided this finance and finance terms information at the time of the offer to allow the seller to determine if they want to accept this offer based on the buyer's intended loan terms. In other words, the seller has the right to reject an offer because the seller or their representative may feel the loan terms are not capable of being obtained in the current market. Of course, from a seller's perspective, the best offer, other than an all cash offer, is the one in which the buyer has already been approved for financing subject to the property appraising. Then of course the burden is on the property being worth what the seller purports it to be.

In AZ we use two documents. The LSR - Loan Status Report which must be submitted along with an offer to purchase, and a LSU - Loan Status Update. This LSU allows the seller or sellers agent to request a loan status update in writing and also provides a place for the Loan Originator (LO) or Processor to indicate the date of which each part of the process ha been completed. If the LSR was completed and signed by the loan originator the LO has agreed to provide the LSU when requested by the seller or sellers representative. This is done in an effort to assist the seller is knowing the buyers diligence and status in the loan process.

Next question is if the buyer discovers after escrow opens that they are having difficulty obtaining the loan are they obligated to tell the seller? In AZ the contract states that the buyer must notify the seller of changes to the terms and conditions of the loan they are seeking (ind. on LSR) and must receive seller written approval if such changes would: 1-delay the closing, 2-make it more difficult for the buyer to qualify, 3-increase the settlement fees/loan costs to the seller. If the buyer failed to do so it may be grounds for breach.

There is an AZ supreme court case Lombardo v. Albu which deals with the buyers and buyers agent duty to disclose to the seller if the buyer or buyers agent is aware the buyer is having difficulty qualifying for finance. In other words, if the buyer knew the buyer was having difficulty qualifying for financing the buyer or buyers agent would have a duty to disclose this even prior to the seller accepting the offer. This means if the seller was determining which of multiple offers was the best offer and more highly probable of closing this information would be material in the sellers decision to accept or reject an offer.

The next issue is that in AZ you possess the right to continue to market your home for sale even if you have accepted an offer/contract. If your home is listed with a REALTOR to accomplish this you must provide your REALTOR with written instructions to continue to market your home while in escrow at least to the point of removal of all contingencies to the contract. Your responsibility if you should desire to accept another offer during the escrow period is that you make certain the 2nd offer you accept indicates wording similar to "this contract is a back-up offer namely contingent upon the cancellation of a previous offer between (Sellers name) and (Buyers name)" Talk to your legal counsel or REALTOR to determine the appropriate language for your state and situation as the wording will differ. You may also be obligated to negotiate this into the original contract so the buyer is aware so be sure to ask your representative or legal counsel. Also, Each MLS has different rules with regard to active listings.

All in all, my recommendation is for you to seek legal counsel if you believe you have been wronged. I am not an attorney and this is not to be construed as legal advice. This is what experience affords when selecting the appropriate local REALTOR to represent you.

I am certain you were hoping for a different answer.