Buyers financing fell through. Do I have any recourse?

33 Replies

Here's the scenario. After agreeing on sale price and having their inspection, the buyers and I agreed in a repair amendment that I would make certain repairs to my property which ended up costing me approx $4,500. Now, we are out of the option period and with just days left until closing they went out and bought a new car! Needless to say they can no longer get financing for the house. They are in breach of contract and I will get their earnest money but I'd really like to know if I have any legal recourse to take regarding all the repairs I had made as we had agreed to in the contract?

"This is a legal question, and I am not a legal attorney" That said, are they out of their financing contingency? If they aren't, theres a chance you cant even keep their earnest money. Im also not sure what you could really go after them for? They screwed up their own financing by being stupid, but Im not sure if theres a legal basis there

Read your contract, you may or may not be entitled to the EM, but nothing else as the contract likely addresses this.

Well, not sure if I'm explaining this well but, we had agreed that I would make the repairs that they requested provided that they then buy the house. The repairs have been made and now they are not going to buy the house. Is that not breach of contract?

Yes, that's a breech of the contract. Next question is what are you remedies. Your contract will spell that out. Usually its "liquidated damaged". That means you keep the EM and that's it. If it says "specific performance" then you can push them to buy the house. Which they're not going to do - they can't. Does your contract say liquidated damages or specific performance?

Assuming its liquidated damages, and the deadline for their financing contingency deadline has passed, then you can keep the EM. If the financing contingency deadline has not passed, you won't get to keep the EM.

Put it back on the market and find a new buyer. Hopefully the repairs were things that will have value to the next buyer.

Read All of your clauses in your contract, it might or it might not addresses your concern.

My personal opinion (not a legal one) that you did not suffer a real loss.You need to sell the place, and the property now probably worth more because of those improvements you made and may be will even sell faster!

My wife has a saying that she tells me on ocassions when she thinks i need it:

It is not worth looking back focusing on the negative, as it will not solve your initial problems anyway (in this case the sale of your house) just focus on the positive side, and the problem will solve it self.

I believe she right!

Good Luck to you, and i hope it works out for you!

Under the circumstances, I'd say if the bought a new car after they applied for a loan you may have recourse as they would be more aware of having to qualify and were negligent or intentionally blew the deal as they changed their minds. If the car deal was before applying for the loan, they and you can chalk it up to stupidity.

You'll be hard pressed showing that making repairs or improvements are a loss to you, you'll still benefit. :)

It's really about what's in your contract. Some give options for earnest money as liquidated damages. Some give a remedy to sue only and some let you do both related to varying contingencies that were broken.

In residential there is more regulation on what provisions are allowed or not versus commercial where you can see almost anything structured.

I think there needs to be a distinction between UPGRADES and REPAIRS. REAPAIRS are deficiencies with the property that needed fixing anyways. Upgrades are additional features to a property buyers see value in.

I have seen sellers say in the past they put a new roof on like the buyer is supposed to bow at their feet. The buyer considers that a maintenance item and EXPECTS the seller to do that anyways.

The car thing you would not believe how often this or buying furniture happens. The buyers think we are closing in a month to a few weeks so will go ahead and get nice shiny toys for our house. They do not understand that lenders do a soft pull right before closing to see if any new debt is shown that alters the loan approval.

I don't do residential but I am helping my brother in law. They are closing on a new house end of this month. Both cars are paid off but wife has a 10 year old car and wants a new one. I told her wait until you get keys to the house and have closed the loan. Anyone can get a car but house lenders are stringent. They have over 800 credit scores but a new car would blow debt ratios out of the water. You would not believe how many lenders or mortgage brokers do not go over these loan deal killers with buyers when they should.

Any mortgage originator worth a hill of beans tells applicant's not to incur any other loans until after closing, loan officers/brokers mention it because it happens often enough to tell people, standard comments. As Joel mentioned some people get a "buy it" frame of mind from a large purchase, can't wait to go buy furniture or new appliances. Lenders know this and they were likely told. Did they understand? No idea. Was it intentional? Don't know. :)

If the buyer can afford both no harm done and most lenders will let greed get in the way of lending when they make a loan and never tell the borrower to not incur more debt.

Joe Gore

Thank You all for your responses! The deal has fallen through and I'm waiting on the title company to terminate the contract and send me my earnest money. @Bill, your point of them being negligent is very valid and although I don't believe I can prove anything in a court of law, it is something I'm going to pursue a little bit further. I just can't believe the stupidity of people sometimes, truly mind boggling! *banging my head against the wall*

Latest update. So, this morning my Realtor advised me that the buyers are not going to release the earnest money and are now saying that the deal fell through because the property was not up to lender approval. The deal was not financed because after the buyers were pre-approved for the loan and after the option period expired, they went out and bought a new pickup truck with a $700/month payment. After the lender did a soft pull on their credit just before closing they then denied the loan. I have asked for them to provide proof that they were denied funding due to the condition of the property. The title company has the last say in who gets the earnest money. I'm wondering if there is anything I can do?

I have a few choice words to describe the buyers Realtor, but am afraid of getting banned on biggerpockets... Can I go after this Realtor in ANY way??

Generally, the title company does Not have the last say. Your contract should address this also. When there are conflicting demands for the deposit held with a title company, usually it takes a court order, when means filing suit. That's why here in Fl I have the deposit escrowed withe the RE broker, as after both sides write a letter stating their case, the Broker can get a determination from the RE commission, and distribute the deposit. Some agents feel like they have to defend their client, right or wrong, and "help" them get their dosit back. Your recourse is against the buyer, not the agent. It will take a denial letter from the lender, and if they lie about it being a property condition, they'd need some property condition report to back it up, and you'll have to disprove it. If it's purely a deposit dispute, and not a specific performance claim, you should be able to continue marketing and selling the property to someone else.

Did the buyer have a weasel clause in the agreement? If the lender did not approve the borrower, the borrower cannot keep the EM. Let the title company know you will go after their E & O insurance for fraud.

Joe Gore

Not sure what you mean by a weasel clause?

@Nick R.,

I was talking about did the agreement say base on lender approval.

Joe Gore

It does say that, "This contract is subject to Buyer being approved for the financing described in the attached Third Party Financing Addendum for Credit Approval." They attached the pre-approval. After the option period had expired, they notified me of the denial of their loan request. In the "Notice of buyer's termination of contract", they terminated the contract due to "Buyer cannot obtain Credit Approval in accordance with the Third Party Financing Addendum for Credit Approval to the contract." AND they checked box 3 which states, "the Property does not satisfy the lenders' underwriting requirements for the loan under Paragraph 4A(1) of the contract." That is false, the property satisfied the lenders' requirements, they canceled the appraisal after they found out they were denied the loan due to them buying a new vehicle, they have no proof that the lender denied the loan based on the property.

They would get their earnest money back had they terminated the contract during the option period and I would not be fighting this. They terminated the contract AFTER the option period had expired and are now trying to saying that the lender denied the loan based on the property in addition to them no longer being able to get approved.

Hope this makes sense?

Do you have proof that the lender denied the loan due to them buying a new vehicle?

Joe Gore

We don't know the language of your Tx contract. The "option" period and the financing contingency are likely not related. The "preapproval" is irrelevant, as is the reason for financing being denied. The language relating specifically to the financing contingency is what matters. Either the financing contingency was removed by some time function/written communication OR it was not. The language in the contract is all that matters.

@Nick R.

After a quick google search for your contract/financing addendum:

The first paragraph of the Financing Addendum has a specific blank-".....Buyer may give written notice to Seller within ______days after the effective date of this contract....". The question is, how many days is in that blank, and was notice delivered to you within that number of days? This is what matters. I suspect they went beyond this date, but we don't know, which is why they are trying to claim the denial was based on property condition, which would be allowed under 4.A.1 of the contract.. If they exceeded the days/date in the financing addendum (not the option period) then they would be in default, assuming they can't make a case for the property condition allegation.

Thank you Wayne for pointing that stipulation in the Finance Addendum in your last post. We had "20" days specified in that blank. Hence, as you said, they likely are trying to state that "the property does not satisfy lender requirements", even though they never had an appraisal or any proof to back this up.

@Nick R.

I am sorry you have to deal with unscrupulous buyers. Unfortunately, you have little recourse. I have been in a similar situation, and all the mortgage lender has to do is draft a letter saying that the property did not meet their requirements. Frankly, the mortgage company is more interested in maintaining their client than returning your EM (as they have no vested interest in you).

My best advice mirrors those above, focus on the positive. You have improved the property and increased it's value. Find a buyer and don't let grass grow under your feet.

It is easy to lose sight of the forest through the trees when someone does us wrong. In the meantime, you are wasting valuable time and energy in a battle that most likely will not be won, no matter how much you were in the right.

Just my humble advice.

I have been unable to get a hold of the buyers to resolve this so I am sending them a certified letter and informing them of my intent to take them to court if they continue to ignore this matter. I have copy and pasted the letter I intend to send them below and any feedback would be great.

Dear Mr. Xxxxxx:

On April 14, 2014, we agreed to terms and executed a Residential Contract regarding the sale of property located at 321 Main St Anytown, TX 75321. This is a legally binding agreement.

I am disputing your claim to release the earnest money to you. On the “Third Party Addendum for Credit Approval”, we agreed that you had 20 days after the effective date of the contract to give me written notice should you not be able to obtain Credit Approval. Twenty days from April 14, 2014 meant that you had until May4, 2014 to terminate the contract and receive the earnest money. I received your notice, “Notice of Buyer’s Termination Contract”, on May 14, 2014. This was ten days beyond the 20 day period we had agreed upon. Please note the first paragraph in the “Third Party Addendum for Credit Approval” where it explicitly states the following:

“If Buyer cannot obtain Credit Approval, Buyer may give written notice to Seller within 20 days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer.”

This clearly outlines the time frame in which you had in order to complete and obtain Credit Approval as well as whom the release of earnest money would go, should you not be able to obtain Credit Approval within the agreed upon 20 days. You did not fulfill this requirement and are in breach of contract.

Also, on the “Notice of Buyer’s Termination Contract”, you checked box “(2): Buyer cannot obtain Credit Approval in accordance with the Third Party Financing Addendum for Credit Approval to the contract.” You also checked box “(3): the property does not satisfy the lenders underwriting requirements for the loan under Paragraph 4A(1) of the contract.” Not only is that claim absolutely false, I made the repairs that you requested in the repair amendment and have contractor invoices to support this. In addition, you never had an appraisal, the property is insurable, and on the “Statement of Credit Denial, Termination, or Change”, the lender declares that the one and only reason for your Credit Denial is “Excessive obligations”. The lender does not make a single reference to the property being the reason for Credit Denial. There is simply no evidence to support your claim.

This letter is to let you know that I expect you to immediately call me at 123-321-4567 or email me at [email protected] OR you may contact Jane Doe at AnyTown Title, 123-456-9876, to sign my “Release of Earnest Money”. If I do not hear from you or you do not sign the “Release of Earnest Money” to me by Friday June 6th, 2014, I will have no other alternative but to file a claim in small claims court to recover the earnest money. Should this matter continue to court, I intend to ask for an additional amount for compensation due to court costs, time off of work, as well as negligence on your part by breaching our agreed upon contract.

I have enclosed a copy of the contract and highlighted the pertinent parts which I referenced above for your review.


Xxxx Xxxxxx

If the buyer not approved there is a chance the property was over price, and if it went to small claims and the buyer said he was not approved because the property was over price you will lose all the way around.

You have no recourse.

Joe Gore

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