Buyer Cancels 23H before closing. Case to keep partial Deposit?

22 Replies

Hi all,

I need the professional to put on their legal hats here, as I have a situation where the buyer purchasing my condo cancelled 23 hours before the closing. Please note that I am the seller/owner and selling agent. Before you get the pitch forks to roast the buyer please read all the facts before automatically assuming I can keep the deposit. As every agent I talk to says I can keep it, but all my attorney friends are pumping the breaks on it. Need to build a real case and I hope I didn't write it to biased towards me. (Hard not too)

Condo location was North New Jersey:

Background.

  • Buyer agreed to buy my condo 10/12/17 for $320,000 with 20% down, and went under contract on 10/16/17. 
  • Buyer works at the bank corporate office in an upper management position, and the mortgage was from that bank. (Note for later)
  • All inspection requests and repairs were satisfied. 
  • Deposit of $20,000 was given to my attorney to hold in an escrow
  • Appraisal came back for $310,000, and buyer's attorney contacted me saying they would give $305,000 and $10,000 cash on the side. My attorney sent a letter noting we would not sell it for less than $320,000 or we would put it back on the market. They agreed to pay the difference.
  • Commitment letter was due 11/15/17, however my attorney did not request it since everything seemed to be moving in the right direction and they showed no red flags (failure on our part)
  • Last email from buyer's attorney on 11/21/17 said "We are still on target for November 30th - finalizing with our lender."
  • Closing was scheduled for 11/30/17 at 1:30pm, and I received a call the day before on 11/29/17 at 2:30pm from my attorney saying that their attorney just notified him saying they did not have the cash required for the closing.
  • The attorney mentioned the buyer's sister was suppose to provide a gift but never did. (Should have been aged in the buyer's account already)

Cancellation email from buyer's attorney:

"Per our conversation, our client's loan is being denied by Bank *****. I will provide you with the denial letter as soon as received so that the deposit monies may be released.

We apologize for any inconvenience to the seller as this situation just happened yesterday. We have no issue with the seller immediately relisting the property.

Thank you for your understanding in this matter. "

Here is what the contract says: 

Note we were past the 10 CALENDAR day mark.

 Here is what the Rider says that removes the timeline:

After the deal was cancelled, their attorney requested the deposit to be returned, however I instructed my attorney not to return it. My attorney believes through the contract we are not eligible to keep it due to the timeliness factor, however, I believe it was canceled in bad faith.

Points circling around my head:

  • The sister should have provided the gift amount within a reasonable time for the funds to clear. 
  • The bank should have identified that the amount of down payment was not available before the eve of the closing.
  • This leads us to believe that towards the last week the buyer and her sister did not want to close on the condo if the only reason was that the gift was not available?
  • It also, seems like they are not making any attempt to work out the deal in a different manner even if takes another week or two. Which shows they don't want it at all for other reasons then not being able to get the mortgage.
  • If they put down $20,000 (6.25% of $320,000) already, she should have been qualified for a loan as that's higher then the FHA minimum of 3.5%.
  • Buyer's LinkedIn career, typically has an average salaries of $200,000+. (I hate to assume, but I come from the same industry). Small loan compared to her salary.
  • They agreed to 20% knowing they needed the cash the whole time. Especially after the lower appraisal.
  • Essentially they were leading me on with no funds? That’s the one thing they can control to get out of buying the house.
  • No other reason on the application except no cash.... which implies negligence of bad faith since they were stringing me along with no funds to back their contract.... they should never have went under contract unless they had funds. She had good credit, and was a valid candidate.
  • The other agent at the time offered me 305k with “10 cash on the side” verbally. Showing no signs of a lack of cash.
  • Anyone can get out of buying a house if they refuse to pay the rest of the down payment?
  • if you bring it to court and the buyers talk about sibling arguments.... and then breaking the deal with each other.... l look like the victim paying the consequences...
  • I feel like the buyer's agent  is hounding me now bc he can’t find them another house unless they get the deposit back...

At the end of the day I just want $4,290.30 of the $20,000 deposit to cover the time it was off the market during October & November. Which I believe is very fair? I am not greedy... 

What do you guys think?!?!?!?!?! 

@Fred N.

You’ll have to check with the language of the contract and your attorney.

Failure to obtain financing is a contingency and the buyer usually gets their money back.

Fighting it drags on the issue. You won’t be able to relist it until the escrow is released.

Buyers have a lot more outs than sellers.

The quicker you release the escrow the quicker you can remarket the property and find another buyer.

The other option is to agree to a lower price so the buyer doesn’t have to come up with cash for the appraisal difference. Or, if you feel like the appraisal is off, then get a 2nd appraisal so that the loan amount can be increased.

Pump the breaks indeed.

As much as it pains me to tell you this, I don't know how you can keep this deposit.  

Most contracts are subject to financing, and this trumps any inspection timelines, or disclosure timelines.  Because the financing piece goes right up until the end, there are many things that can happen.  I could've told you at the point where the appraisal came in low, that this would've been an issue.  I would've had my attorney contact the Buyer's attorney for verification of funds for the overage to make sure that she was going to be able to perform beyond what she originally planned for (especially if she was receiving gift funds.  Obviously she was tight on money, so the extra required should've bee a red flag to do more verification).  You should be able to request a status from the lender at any point.  I utilize this process regularly so that nothing gets slipped by. 

I am glad that you see some errors on your side.  I see them too....in a few places, but I don't want to rub salt into an aready stinging wound.

Best of luck to you!

FYI, if you request the funds, and the Buyer contests, the Title company can throw it into arbitration, which costs both parties money just to facilitate, and it will hold up your property.

To avoid this in the future, make your earnest deposit NON-Refundable upon completion of the inspection and appraisal period.  You won't have Buyers going beyond that point who aren't confident that they are going to be able to perform.

@Cara Lonsdale @Christopher Phillips

The condo is currently under contract with a new buyer, and I have not released the funds yet from the the former buyer. Again, I think I am going to push for the $4,300 for bad faith negligence. I believe they wanted out of the deal and just held out on the sister's gift transfer to cancel it, and according to the contract if the buyer fails to obtain the mortgage commitment due to bad faith, negligence, intentional conduct or failure to diligently pursue the mortgage application then the escrowee shall not return the deposit.

@Fred N. No doubt, but what can you PROVE?  Bad faith is very hard to prove.  You will have to prove this to either the entity holding the funds (title co or attorney), or pay for arbitration and prove it to the arbitrator.

I agree that it doesn't hurt to ask for the compromised amount, and maybe they will agree to pay it in order to avoid the same process of arbitration.  However, if they contest, just be ready to lose.  From what you have provided, I don't see you getting the funds.

@Cara Lonsdale

I appreciate the feedback and honesty, I still feel it's worth taking a shot. It's a crappy situation, and I don't want to be blind to reality because of pride, but buyers can't just not comply with the broker bc they get cold feet towards the house in the last hours. Working with my attorney now who is holding the escrow to come up with a game plan. 

Originally posted by @Fred N. :

@Cara Lonsdale

I appreciate the feedback and honesty, I still feel it's worth taking a shot. It's a crappy situation, and I don't want to be blind to reality because of pride, but buyers can't just not comply with the broker bc they get cold feet towards the house in the last hours. Working with my attorney now who is holding the escrow to come up with a game plan. 

 I agree....and I hear your frustration, and can appreciate it.  I HOPE you are able to get some of it.  Keep us posted.

This may just end up being a very expensive lesson in holding the Buyer's side more accountable, more frequently.  As mentioned previously, if those checks and balances would've been in place all along, you wouldn't have gotten this far.  The deal would've collapsed earlier OR you woud've had a stronger case (more proven evidence) to keep the money.

My thoughts, in a nutshell: you are looking for approximately 1% of the selling price. I'd let it go, especially if you've found another buyer. I would have either pushed for the closing or earnest money; looking for that 1%, considering that it's already under contract, looks like you're trying to get some gravy if I'm the arbitrator (or judge). If you had to take a significant cut, and could prove financial damages due to deliberate actions by/on behalf of the buyer, you might have a case, but this is not worth pursuing in my opinion. 

Originally posted by @Cara Lonsdale :
Originally posted by @Fred N.:

@Cara Lonsdale

I appreciate the feedback and honesty, I still feel it's worth taking a shot. It's a crappy situation, and I don't want to be blind to reality because of pride, but buyers can't just not comply with the broker bc they get cold feet towards the house in the last hours. Working with my attorney now who is holding the escrow to come up with a game plan. 

 I agree....and I hear your frustration, and can appreciate it.  I HOPE you are able to get some of it.  Keep us posted.

This may just end up being a very expensive lesson in holding the Buyer's side more accountable, more frequently.  As mentioned previously, if those checks and balances would've been in place all along, you wouldn't have gotten this far.  The deal would've collapsed earlier OR you woud've had a stronger case (more proven evidence) to keep the money.

I 1,000% Agree, and will make sure my contracts and rider's are bullet proof going forward to avoid this situation!

Thanks Cara!

Originally posted by @JD Martin :

My thoughts, in a nutshell: you are looking for approximately 1% of the selling price. I'd let it go, especially if you've found another buyer. I would have either pushed for the closing or earnest money; looking for that 1%, considering that it's already under contract, looks like you're trying to get some gravy if I'm the arbitrator (or judge). If you had to take a significant cut, and could prove financial damages due to deliberate actions by/on behalf of the buyer, you might have a case, but this is not worth pursuing in my opinion. 

Yes, only 1%, but this was a flip and those two months do cut into my margin. I'm not going to fight to death for this, but if it just costs me a little bit of time, and 2-3 letters from my lawyer/good friend.... to me it's worth it. Again, if I was asking for the full $20k, the judge would absolutely tell me to shove it, but I am just asking for two months of overhead. Essentially, the cost of the house being off the market with bills to prove it.

@Fred N. Best course of action is to follow your attorney's advice.  

Tell him you want to push for whatever you're entitled to - which will be determined by ONLY your contract - but just don't burn $10K in legal fees to collect $5K.

Charlie MacPherson, Real Estate Agent in MA (#9532146)
781-412-4151

“They should never have went under contract unless they had funds” - BiggerPockets is probably the last place where people would agree on this (read wholesaling) but I agree lol

This is why I insist on a large option fee which is not refundable.  Too many loopholes with EM.

Your 25% ask is certainly reasonable but why would anyone casually agree to coughing up $4-5k for nothing?

In your defense, if they went past the documented loan contingency date per the contract, that’s the end of it. EMD is yours. However, it looks like commitment date is 11/15, and they have 10 days to back out. Why do you even have that in there?

I see no real “bad faith” here from the buyer. The lender is not very smart though because the “gift” should have been in their account way in advance and confirmed by lender by 11/15 if anything.

That all being said, that EMD is ridiculously high, even for a seller’s market! As a buyer I’d have ran in the opposite direction.

If ever you find yourself in a situation where the buyer agrees to an overage, get it in writing and require the extra as additional escrow to be delivered ASAP. This way they can’t argue lack of funds. Other than that, don’t cry over spilled milk, and don’t put your current contract at risk. If they find out you are back under contract while refusing to return their EMD they may file suit to stop sale pending release of funds. If they are successful it could cost you a lot more. Talk to your attorney and find out what their recourse is with regards to disputed funds. If your sale is in jeopardy in any way I would release the funds ASAP and get them out of your hair.

@Fred N. In my opinion, especially since you mention you have it under contract with a new buyer I would move on. If I were in your shoes would I be mad?... Absolutely. There is not doubt about that. As I look at it though, why not focus your energy on closing with the new buyer. If your going to pay lawyer fees and spend time to try and get a small chunk of that $20k why not just spend that energy going and doing something else to set yourself up for bigger success in the future. Your goal is to sell the property, clearly you have someone new ready to help you meet that goal. I would move on and focus on finding your next opportunity be it in real estate or something else important to you.

I don’t know your state laws but in Texas the title co will not release earnest money until both parties sign a release stating who gets the money. I had a number of times where buyer clearly backed out but it would cost me too much time and money trying to keep the EM instead of just finding another buyer. I don’t know why the buyer would agree to give you any of the EM if they are not required under contract.

I can't really add to this conversation, but I did have a question while reading this. Do you (the general American you) not have a condition date at which time the buyer must waive all their conditions (financing, home inspection, etc), and after that the deposit becomes non-refundable? In Canada, the buyer has typically a week or so during the condition period to finalize the mortgage and get full approval and sign the mortgage commitment. Once that's done, the financing condition (and all other conditions) are waived, and should there be any issue with the mortgage or funds not coming through, too bad buyer, your deposit is gone (and rightfully so). It seems like that's not how it works in the US? 

Forget reasons why, basically contract to purchase, did not meet mortgage clause, deposits, money for closing ect was not followed up on both sides or commitment letter waiving on your side, if you already have a buyer cut loses, and go forward, if you try to prove loss you may end up with more loss as a legal battle may prevent you closing with new buyer then any judge will say that is your fault, expect loss time and expenses next time as stuff happens, unless you can prove you turned down other contracts would be hard to prove, technically if appraisal short they could have outed then, so be glad if you get more than the appraised value and take that as a win while you still have a buyer     its worth more to you to let it go than to the buyer and keep your title clear 

Forget reasons why, basically contract to purchase, did not meet mortgage clause, deposits, money for closing ect was not followed up on both sides or commitment letter waiving on your side, if you already have a buyer cut loses, and go forward, if you try to prove loss you may end up with more loss as a legal battle may prevent you closing with new buyer then any judge will say that is your fault, expect loss time and expenses next time as stuff happens, unless you can prove you turned down other contracts would be hard to prove, technically if appraisal short they could have outed then, so be glad if you get more than the appraised value and take that as a win while you still have a buyer     its worth more to you to let it go than to the buyer and keep your title clear , and escrow in n jersey often with attorney not title co as closings are typical conducted by attorney in north

This is such a state-specific and contract-specific situation.

Here in Texas, if there's financing involved, the buyer can cancel the contract and receive the EM deposit back if they can't lock up their financing with X days, which is stipulated in the contract. Once you go past that X days without canceling the contract, then the EM would go to the seller if you can't close.

I had a deal blow up this year over something like this. The buyer was using FHA financing. And there was a delay in closing. My client (seller) agreed to extend the closing date a couple of weeks.

Then at the last minute the lender asked for more time because of some un-reimbursed job expenses on their tax return. My client had a fit and refused to extend the closing date any further. Since we were past the deadline to cancel over financing, the seller kept the EM deposit.

@Fred N.     Trust your attorney.  They're probably trying to keep you out of trouble.  If you don't trust them to give you the right advice, you need to change attorney.

I don't think this is a battle you win.

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