Expert: Karyn Foley - 6/27/2007

Question
Hello, we recently signed a contract to sell on July 31 to a young couple starting out. They put up a small deposit ($500), which I thought was too low, but I reluctantly gave in and agreed. They provided my agent a pre-qualified letter from the bank and everything looked good. Three weeks into the process and one week before closing the bank notifies them that they cannot get financing without a large down payment. They were advised by the bank to wait about six months and come back. Their agent has contacted my agent stating that the buyers want all their deposit money back. There is a clause in the contract stating that if the buyers cannot get financing they are entitled to a refund of the earnest money. My question to you is this: are the buyers required to attempt to get financing at one more than one location before just giving up? Their agent told my agent that after hearing the news about their original loan being denied, they did not want to pursue any other financing attempts. To me they did not exhaust all opportunities to try and get financing and thus did not show good faith are their part. As a result of this I feel I should be able to keep the earnest money. What do you think?

Answer
Dear Pete:  Without seeing your contract, I cannot give a strong statement.  Also, it may be a legal matter, so I also cannot give you legal advice.  What I will say, however, is that I do not think you were well represented.  I agree that five hundred dollars was too small a deposit. Your agent should have insisted on more; even though it may not have impacted the outcome, it would have given the buyers clear noticed that this was a serious undertaking.  Also, your contract should have stated a specific time, such as three weeks or so in which to obtain a formal loan approval securing the financing, and that after that date, the buyers should have signed off on that contingency.  A prequalifying letter is not a preapproval letter.   The latter should have been required, stating that the buyers credit had been checked, down payment ok'd and verified, interest rate and so on.  Then, the lender would have been obliged to either give a complete approval or then indicated that the loan in question not obtainable. All in all, you can try to negotiate the deposit, but it is too small to make an impact, and you might have to prove that you were damaged.  Damaged mean ultimately selling for less, and that is within the jurisdiction of an attorney.  Why not just lick your wounds, give back the money, put it behind you and move on?  If you wisely do this, then either replace your agent, or make certain that all contingencies such as financing and inspections, et cetera are done within the first three weeks and signed off by all parties so that all are clear on proceeding.  Your agent may well have done that,and, if so, just continue on with that agent.  Many deals do fall through, until the right one comes along.  It is better to have been told today that the transaction is over, rather than waiting until just the last moment.  Also, buyers are able to obtain financing through the lender of their own choice.  But, if you want to be really tough, have it a contractural agreement that the buyer will also file a loan application with the lender of your choice whom you know and trust, or one of the agent's favorite lender.  While you cannot force the buyer to use that lender, that lender can give you a more objective picture of the buyer's qualifications.  Also, make certain that the buyer is obligated by contract to pay a higher interest rate (say, a half point above the interest rate at the time of the contract) in case the rates go up.  If the rates did go up, then the buyer has agreede to pay the higher rate.  Be aware that lending institutions are much stricter today.  One hundred percent financing is a thing of the past in many markets.  The bigger the down payment, the greater the chance is that the buyers will get financing.  Twenty percent down is ideal, even loans that offer a five percent first trust deed and a fifteen percent second trust deed, for a total of twenty percent down but not using more than five percent directly from the buyer.  Have your agent,or a lender, sit down with you and teach you about loans so that you will be more informed and sophisticated for your next offer. Perhaps your agent could also sit down with you and explain the fact of life regarding buyers and loan applications.  Next time you will know more and be better prepared.  I know you will be more successful the next time, and lots of good luck to you.  Let me know if I can answer any questions.  Karyn Foley