Escrow and contingencies expired but not signed for removal

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Escrow and contingencies expired but not signed for removal

Will Lee
Irvine, CA · Member since 2016 · 18 posts · 3 votes
Thank u for any info before hand: Context: Family friend in escrow to purchase 4 plex in northern Cali . Loan was originally verbally communicated to go thru then had issues appraising. Investment appraisal came in 10k under but market comp appraised at value. Loan took 2 months to finally "verbally" approve but now Escrow and contingency all expired but not actively signed to remove. All docs are 1 month expired. Notice to perform threatening cancellation and going to arbitration (directly insisting that buyer would lose deposit) was only made 1 month after escrow expired (2 days ago) We feel these are empty threats but getting stressed since agent is dual agent and not acting in best interest of buyer in his communication and not providing solutions besides asking for buyer to sign removal of contingencies and release deposit to seller for 2 more weeks but Bank said they need 3 more weeks to close. Assuming this is standard California association realtor form. Buyer doesn't want to risk deposit in situation since bank is flaky and wants to sign loan papers before releasing deposit and contingencies (even tho already expired) Seller threatening to cancel and take to mediation Unless release of deposit is signed (scare tactic for leverage?) Buyer is sill interested in property but can't do anything to speed up loan as its in banks hands and has communicated appropriately: Agent is not helping with advice beside signing release. Seems like conflict of interest. Never proposed to ask for ext of escrow or contingencies to seller in addendum ( as I think he should have) The question: Should buyer be concerned about deposit if seller follows thru with cancellation and mediation? Buyer would like to proceed but just needs more time (limited to bank). Otherwise would like to cancel with deposit back. Seller not accepting above request unless deposit released. Please help as this has become stressful for father in law who pulled out of 401k to buy property and consistently getting threats of losing deposit since its buyers not performing and therefore is liquidated damages is buyers responsibility to pay. Thanks you!
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y

Hi @Will Lee,

I am not a lawyer, talk to a lawyer, this is not legal advice. 

The most common interpretation of the CAR RPA is that the buyer's EMD is protected by the relevant contingencies until said contingencies are lifted by them signing specific paperwork to that effect. I've never been involved in litigation, but agents (including those with law degrees) tend to act in a way that is consistent with them believing this interpretation is the correct interpretation.

Of course it is a conflict of interest. Of course it is a scare tactic. As a smart fellow once said, no one can serve two masters and make both happy. The listing agent works for the seller, I don't care what the dual agency disclosure paperwork says. Until a REI has a half dozen or so deals under her or his belt, she or he should use her or his own agent.

Also, trying to close a 4plex investment property with any big bank? Like throwing spaghetti at the wall. Some of it will stick, sure, but a lot will fall off without good reason. 

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  • Kiersten Vance
    Real Estate Agent · Redlands, CA · Member since 2016 · 253 posts · 115 votes
    10y
    Does the buyer still have the inspection contingency? It has to be formally removed for it to count. If they have the inspection contingency, they can cancel based on "finding something" they don't like and would get their deposit back. Also they should still have the loan contingency as the financing hasn't gone through, they can cancel. If they bank is sure it will go through, they may want to consider releasing something to the seller in exchange for a month long extension, so they have plenty of time.
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    Hi @Will Lee,

    I am not a lawyer, talk to a lawyer, this is not legal advice. 

    The most common interpretation of the CAR RPA is that the buyer's EMD is protected by the relevant contingencies until said contingencies are lifted by them signing specific paperwork to that effect. I've never been involved in litigation, but agents (including those with law degrees) tend to act in a way that is consistent with them believing this interpretation is the correct interpretation.

    Of course it is a conflict of interest. Of course it is a scare tactic. As a smart fellow once said, no one can serve two masters and make both happy. The listing agent works for the seller, I don't care what the dual agency disclosure paperwork says. Until a REI has a half dozen or so deals under her or his belt, she or he should use her or his own agent.

    Also, trying to close a 4plex investment property with any big bank? Like throwing spaghetti at the wall. Some of it will stick, sure, but a lot will fall off without good reason. 

    2Reply
  • Will Lee
    OP
    Irvine, CA · Member since 2016 · 18 posts · 3 votes
    10y
    Thank you so much Kiersten and Chris for your response! This was stressful as I am not experienced investor and was pulled into the situation just 3 days ago to help the family out. Been reading non stop and seems consistent to what both u are saying. Update: After sending an email calling him out that he should have extended escrow. I Provided 2 options to the group. 1. Extend escrow for another 3 weeks (based on banks estimate) and remove all contingencies except for loan contingency. No release of deposit. 2. Cancel and walk away. Or go into mediation if seller wants. The seller immediate response was "no, we will not extend unless u release deposit and we will take ur money in mediation" After 2 days of no updates from the agent, he finally replied that he still wants to officially provide my option 1 to seller and thinks he can convince her (conveniently now) New question: Is the easiest and safest option just to walk away and cancel? Should I even allow option 1 and remove all contingencies except for the loan contingency at this point? Should I be playing hardball and not provide any leeway either just like the seller originally communicated. Instead just tell agent to officially request for extension with no contingencies removed? Annoyed that the agent let us struggle to find the answers when he should have been propose options (in buyers best interest). Understood now that in dual agent situation, they basically work for seller. Thanks again!
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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    @Will Lee, I am not licensed in California, but I am licensed in Colorado. What I see happening is this:

    The buyer has let the contingency expire. This means that the contingency is no longer valid. I don't see the specific contingencies, but I'm assuming you are talking about the finance contingency. If your contingency states you have until September 1 to be approved for financing, and you are not approved by September 1, then you would have had to cancel the contract or ask for and receive an extension prior to the end of day of September 1 in order to have a still-valid contingency or access to the deposit. 

    In my understanding (based on Colorado real estate law) your deposit money is already not returnable under this contingency. If you do not have any more contingencies still valid, your deposit belongs to the seller if you buy the property or not.

    The dual agent is not a good idea in many circumstances, and this is a perfect example of why. The dual agent is not allowed to make suggestions, only give factual evidence and information. Yes, they should have contacted you to remind you that your contingency period was coming to an end, and I'm assuming they did not. 

    The dual agent will not act in the best interest of the buyer, and should also not be acting in the best interest of the seller, but be a neutral third party facilitating the deal. But that depends on how they are contracted. Is the agent a transaction broker, working as an intermediary between the two parties? Or is the agent representing the seller, and the buyer is a customer? Meaning they have no duty to the buyer, other that to fill out the required paperwork?

    The buyer should be concerned about the deposit. Unless there are outstanding contingencies, I think this is gone. (Again, I haven't read the contract and am licensed in another state.)

    When was the closing set for?

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  • Shannon Wright
    Escrow Officer · Temecula, Ca. · Member since 2016 · 418 posts · 152 votes
    10y

    It is my understanding (I'm not an agent) that contingency removals are not passive, but active (unless otherwise stated in the RPA). If you haven't removed them, then they aren't removed, but that doesn't mean the EMD is not at risk since you are technically out of contract.

    Have you considered going to the broker of the agent's office and asking for another agent to represent the Buyer based on the current agent's failures to represent to date? Brokers hold the representation ultimately, not the agent, and if you make waves the Broker may find a solution for the Buyer that will work.

    Also, you should know that if escrow is cancelled and the EMD is stuck until mediated/arbitration, the Seller is legally unable to sell the property to anyone until the escrow is resolved and funds are released. So, as long as the money is being held up, the Seller is being held up with selling the property. Of course, a lot Sellers try and get around this and will take a new buyer to a new escrow company, but then the old buyer stuck wuth funds in the old escrow would have legal recourse (you would have to find an atty to help, probably).

    1Reply
  • Will Lee
    OP
    Irvine, CA · Member since 2016 · 18 posts · 3 votes
    10y
    Thank u everybody! Mindy Jensen thank you for the info. In California it required for an active removal of contingencies Chris Mason Shannon Peace Thank you both for great advice. Loan officer confirmed 100% it will close in 2 weeks (can she guarantee that?) and advised us to release deposit. I got great advice to treat this dual shady agent as a puppet and don't reason with him , instead tell him what to do. Now in the middle of negotiating terms for addendum. Seller wants 300 dollar penalty /day in case escrow goes past new date and release of funds. Question: Should buyer agree to a penalty they can't control? They already willing to release deposit based on loan officers words Is releasing deposit normal at this stage? This is a 6plex that's fully rented on section 8. How will rent be spilt if escrow closes past end of month? Should buyer add language in addendum to make sure it's a fair proration? Just weary of shady agent as he continues to verbally threaten taking buyer to arbitration if he doesn't sign new addendum with penalty clauses. His words "WE (seller and him) will see u (buyer) in arbitration if u don't sign" Thank u again!
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  • Will Lee
    OP
    Irvine, CA · Member since 2016 · 18 posts · 3 votes
    10y
    I also understand it's the sellers best interest to do all this and she is just playing hard ball. Unfortunately my father in law decided to go with the listing agent route which is causing this mistrust. Thank you again!
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Will Lee,

    But they can control it. They picked the lender. That's how you pick how smooth or rocky a process you want...

    Anywho, a more direct answer, you could always ask to see the loan approval. It's not exactly consumer friendly as it's not intended for the general public to see, but you will be able to see what conditions haven't been signed off and be able to make an informed decision either way. 

    "Guaranteed to close in two weeks!" should be relatively few conditions.

    1Reply
  • Shannon Wright
    Escrow Officer · Temecula, Ca. · Member since 2016 · 418 posts · 152 votes
    10y

    $300 per diem penalty is a LOT, unless this a million dollar property. Usually, the per diem is calculated to be the actual carrying costs that the Seller is incurring as a result of your delay in closing.

    Principal + Interest + Insurance + Taxes + HOA + any other carrying costs = Per Diem

    Sometimes the offset of incoming rents are done, as well.

    Many times a buyer will ask the lender to pay the per diem since they are the cause of the delay, have you tried that?

    Have you called the broker of record regarding these threats? It is very clear that the Agent is biased to the Seller and you no longer have proper representation. I, personally, would not sign anything else (even a pre-release) without trying to resolve the dual agency issue. This agent is making 2x the commission for 1 sided work. Dual agencies are almost never a good idea.

    Rents are always prorated through escrow, just make sure that escrow verifies if rents are paid on the date of closing so the prorations are correctly done.

    1Reply
  • Will Lee
    OP
    Irvine, CA · Member since 2016 · 18 posts · 3 votes
    10y
    Thank u all. These live updates are providing confidence in the negotiation. We are deciding to just sign the new addendum due to bank guaranteeing close a week before escrow closes. We are releasing deposit as understood as its a good faith process at this stage when the bank has guaranteed Thank u again for the help!
    1Reply
  • Maria Diegelman
    Residential Real Estate Broker · Valencia , CA · Member since 2016 · 16 posts · 6 votes
    10y
    Hi Will Lee You should have the lender guarantee that they will pay the per diem fees as this will be their fault if escrow doesn't close on time. I understand you already signed but reach out to the lender anyway. They should have no problem since they already told you it will 100% close on time. Just my opinion :)
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