What do you think about this contingency clause?

30 Replies

I am looking for a way to protect myself against buyers causing me to take my house off the market, and end up wasting my time.

What could go wrong if I added this clause to the purchase contract? This says that the buyer will maintain only a backup position until all contingencies have been met. At which time, they will have the primary position, assuming no one else beat them to it. And this will allow me to keep my house on the market.

"Buyer will accept only a backup position until the following contingencies have been met: inspection approval, satisfactory appraisal, final approval of financing, and sale of any of buyer's existing property. After all contingencies have been met, buyer will get primary position, assuming no other buyer's have met this criteria before them."

Final approval of financing wont come until sometimes even the day of closing. That makes this clause nonrealistic

Originally posted by @Russell Brazil :

Final approval of financing wont come until sometimes even the day of closing. That makes this clause nonrealistic

 Why does it take that long for final approval of financing? Why can't they get approved on the same day they're PRE-approved?

Can you suggest any way to handle my problem?

Originally posted by @Patrick Philip :
Originally posted by @Russell Brazil:

Final approval of financing wont come until sometimes even the day of closing. That makes this clause nonrealistic

 Why does it take that long for final approval of financing? Why can't they get approved on the same day they're PRE-approved?

Can you suggest any way to handle my problem?

 Why? Thats just how it works. It takes weeks to underwrite the property and the borrower. Thats how it worked when you bought the place, thats how it will work when you sell it.

Agree, from a practical point of view, it is a ridiculous request....do you think a buyer is going to do inspections, go through the Actual mtg approval process, pay for appraisals, etc all the while knowing other people may be doing this and they could be doing it for nothing?

Your best bet is to have your agent recommend a legit lender....require buyers to meet Their preapproval process (a real one, tax returns, pay stubs, bank statements, etc)....they don’t have use your lender for the loan, but meet their preapproval standards.

Originally posted by @Wayne Brooks :

Agree, from a practical point of view, it is a ridiculous request....do you think a buyer is going to do inspections, go through the Actual mtg approval process, pay for appraisals, etc all the while knowing other people may be doing this and they could be doing it for nothing?

Your best bet is to have your agent recommend a legit lender....require buyers to meet Their preapproval process (a real one, tax returns, pay stubs, bank statements, etc)....they don’t have use your lender for the loan, but meet their preapproval standards.

 I just had a buyer back out because they got cold feet after over a month. They were preapproved from a legit lender, then they simply never went back in to finalize the loan. Hence, they were never approved. Not because they weren't able to but because they didn't want to.

Originally posted by @Russell Brazil :
Originally posted by @Patrick Philip:
Originally posted by @Russell Brazil:

Final approval of financing wont come until sometimes even the day of closing. That makes this clause nonrealistic

 Why does it take that long for final approval of financing? Why can't they get approved on the same day they're PRE-approved?

Can you suggest any way to handle my problem?

 Why? Thats just how it works. It takes weeks to underwrite the property and the borrower. Thats how it worked when you bought the place, thats how it will work when you sell it.

 Of those contingencies I listed, if it fails due to inspection or appraisal, that's my fault. 

Last time, I had buyers that were preapproved and simply never went back in to finalize their loan. They stopped responding to their lender and agent for several days and the deal fell through. Technically, they never obtained loan approval (a contingency of purchase) so the contract became invalid. Not because they were unable, but because they decided not to after taking my house off the market for over 1 month.

@Patrick Philip The standard contract mtg contingencyrequires the buyer to properly pursue the loan and get turned down, not simply just walk away.....I’d refuse to release the EM.  Of course, they may could could get their lender to write a letter that they didn’t qualify, but I’d make them work for it.  And by the way, contrary to some agents beliefs, in FL this does not prevent you from putting the property back on the market.

This is going to happen occasionally, but the clauses you suggested will hurt You in selling the property.

Originally posted by @Wayne Brooks :

@Patrick Philip The standard contract mtg contingencyrequires the buyer to properly pursue the loan and get turned down, not simply just walk away.....I’d refuse to release the EM.  Of course, they may could could get their lender to write a letter that they didn’t qualify, but I’d make them work for it.  And by the way, contrary to some agents beliefs, in FL this does not prevent you from putting the property back on the market.

This is going to happen occasionally, but the clauses you suggested will hurt You in selling the property.

 Don't know if you'll want to read all this, but I attached the text of the contract. To me, it seems like 1 of 2 things is possible.

1: By failing to do their due diligence, they Defaulted on the contract. If that is the case, does that mean I'm out of luck?

2. Since they never gave me any notice in writing, then the contract is forced to go through. If that is the case, how would they have the money to buy the house if they didn't get approved for the loan?

The text of the contract as it relates to obtaining financing reads:

(b) This Contract is contingent upon Buyer obtaining approval of a conventional FHA VA or other ______________ (describe) loan within _______ (if left blank, then 30) days after Effective Date ("Loan Approval Period") for (CHECK ONE): fixed, adjustable, fixed or adjustable rate in the Loan Amount (See Paragraph 2(c)), at an initial interest rate not to exceed _______ % (if left blank, then prevailing rate based upon Buyer's creditworthiness), and for a term of _______(if left blank, then 30) years ("Financing").

(i) Buyer shall make mortgage loan application for the Financing within _______ (if left blank, then 5) days after Effective Date and use good faith and diligent effort to obtain approval of a loan meeting the Financing terms

(“Loan Approval”) and thereafter to close this Contract. Loan Approval which requires a condition related to the sale by Buyer of other property shall not be deemed Loan Approval for purposes of this subparagraph.

Buyer’s failure to use diligent effort to obtain Loan Approval during the Loan Approval Period shall be considered a default under the terms of this Contract. For purposes of this provision, “diligent effort” includes, but is not limited to, timely furnishing all documents and information and paying of all fees and charges requested by Buyer’s mortgage broker and lender in connection with Buyer’s mortgage loan application.

(ii) Buyer shall keep Seller and Broker fully informed about the status of Buyer’s mortgage loan application, Loan Approval, and loan processing and authorizes Buyer’s mortgage broker, lender, and Closing Agent to disclose such status and progress, and release preliminary and finally executed closing disclosures and settlement statements, to Seller and Broker.

(iii) Upon Buyer obtaining Loan Approval, Buyer shall promptly deliver written notice of such approval to Seller.

(iv) If Buyer is unable to obtain Loan Approval after the exercise of diligent effort, then at any time prior to expiration of the Loan Approval Period, Buyer may provide written notice to Seller stating that Buyer has been unable to obtain Loan Approval and has elected to either:

(1) waive Loan Approval, in which event this Contract will continue as if Loan Approval had been obtained; or

(2) terminate this Contract.

(v) If Buyer fails to timely deliver either notice provided in Paragraph 8(b)(iii) or (iv), above, to Seller prior to expiration of the Loan Approval Period, then Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained, provided however, Seller may elect to terminate this Contract by delivering written notice to Buyer within 3 days after expiration of the Loan Approval Period.

(vi) If this Contract is timely terminated as provided by Paragraph 8(b)(iv)(2) or (v), above, and Buyer is not in default under the terms of this Contract, Buyer shall be refunded the Deposit thereby releasing Buyer and Seller from all further obligations under this Contract.

(vii) If Loan Approval has been obtained, or deemed to have been obtained, as provided above, and Buyer fails to close this Contract, then the Deposit shall be paid to Seller unless failure to close is due to: (1) Seller’s default or inability to satisfy other contingencies of this Contract; (2) Property related conditions of the Loan Approval have not been met (except when such conditions are waived by other provisions of this Contract); or (3) appraisal of the Property obtained by Buyer’s lender is insufficient to meet terms of the Loan Approval, in which event(s) the Buyer shall be refunded the Deposit, thereby releasing Buyer and Seller from all further obligations under this

Contract.

(c) Assumption of existing mortgage (see rider for terms).

(d) Purchase money note and mortgage to Seller (see riders; addenda; or special clauses for terms).

If your sale failed because the buyer didn't bother to get their financing then why can't you keep the earnest money and put your property back on the market?  Isn't that the purpose of earnest money and a deadline for applying for then securing financing?  Maybe only accept offers with higher EM amounts?

I've seen people back out as late as the day of closing and forfeit $50,000 in EM because they "...just didn't feel like closing".  Sure the sale failed, that's a pain, but $50k windfall was pretty nice, no wear and tear like collecting rent anyway.

When going with a buyer who is using financing then you are stuck with the times something happens that makes them ineligible for the loan. People lose jobs, people split up, people get sick or in an accident. If they have stopped communicating in any manner it could be they fell in Niagara falls and are lost. Sometimes things happen,I would suggest like Wayne said withhold the EMD and make them at least work for it (That's why it's there). You could go all cash buyers, but they expect discounts.

As far as adding that verbiage, I think it would take anyone with any experience about 30 seconds to counter it or outright refuse and go find something else. Basically they are in backup position, pay for all due diligence, get everything lined up and at any moment you can take another offer. It may be easier to just put "At any time seller can take any other offer until buyer closes". Is there any deal you would agree to with that clause if you were buying?

It sucks but sometimes they fall apart, go get the next one!

@Patrick Philip are you not accepting an EMD then? Because no one will pay an EMD without a signed contract. And lenders require an executed contract before they will underwrite a loan. You would o ly be able to sell to a cash buyer with that contingency.
Originally posted by @Mike Cumbie :

When going with a buyer who is using financing then you are stuck with the times something happens that makes them ineligible for the loan. People lose jobs, people split up, people get sick or in an accident. If they have stopped communicating in any manner it could be they fell in Niagara falls and are lost. Sometimes things happen,I would suggest like Wayne said withhold the EMD and make them at least work for it (That's why it's there). You could go all cash buyers, but they expect discounts.

As far as adding that verbiage, I think it would take anyone with any experience about 30 seconds to counter it or outright refuse and go find something else. Basically they are in backup position, pay for all due diligence, get everything lined up and at any moment you can take another offer. It may be easier to just put "At any time seller can take any other offer until buyer closes". Is there any deal you would agree to with that clause if you were buying?

It sucks but sometimes they fall apart, go get the next one!

 I think my problem was resolved in a previous response, telling me that the contract should state that the buyer must diligently pursue loan approval. My contract did, in fact, say that.

Originally posted by @Tyler Mullen :

If your sale failed because the buyer didn't bother to get their financing then why can't you keep the earnest money and put your property back on the market?  Isn't that the purpose of earnest money and a deadline for applying for then securing financing?  Maybe only accept offers with higher EM amounts?

I've seen people back out as late as the day of closing and forfeit $50,000 in EM because they "...just didn't feel like closing".  Sure the sale failed, that's a pain, but $50k windfall was pretty nice, no wear and tear like collecting rent anyway.

As someone who has a deal that the buyer got a bank commitment, and all other contingencies met, had my house locked up for 2.5 months, they backed out due to accepting a job in FL and wanting to move. They are fighting the EMD. Good luck expecting someone to just hand the money over... I assume most people right or wrong will fight for it. Unless released by either party that money sits, no matter how right or wrong either side is!

The best bet is to stay on top of any buyer, and vet them as best you can. You have NO control over the appraisal or commitment. You have very little control over title/municipal searches or surveys being done. The seller really has no control over the buyers and how the process goes.

Agreed, I understand things happen and there's civility and reputation to maintain.  There are lots of ways out of most deals/contracts and professional courtesy usually causes nearly all sale fails to result in the buyer getting their EM back (especially in residential), even if it's more for practical rather than "letter of the law" reasons.  We all know buyers frequently site things like "inspection", "neighborhood review" etc as a reason to kill a contract, even when that's not the real reason.

I just think it's not right to totally negate the risk of a buyer losing EM, EM is a required element for good reason.  And if a buyer gets "cold feet" as was said, they need to use that as motivation and then find a valid reason to get out of the agreement, but "cold feet" as far as I understand the law as a layman, is not going to be sufficient.  A buyer can't just decide not to and then go Rip Van Winkle without any consequences, it's a contract where they agreed to do certain things by certain dates or risk losing their EM, they are not window shopping for bananas.  For the sake of society and business, contracts should be taken seriously by all parties.

In the example presented the buyer straight up neglected to act as agreed by date agreed.  That seems pretty clear which is why it's a common point in contracts, "applying for financing" is specifically measurable, if they can't prove to escrow they applied by a deadline specified in an offer then that should be a pretty clear breach and the EM should be collectable by the seller.  Now, if the seller then wants the buyer to keep the EM anyway, that's a business choice, not a legal requirement.

Your example and the posters are not the same.  In your example, I agree that is a common occurrence and it's my understanding in that exact scenario most sellers reason it's "better" to agree to refund EM and find a new buyer.   

Diligently persue? I assume you were able to get your EMD then, since your contract did say it?

As long as your lawyer is ready to argue "acceptable effort". 

Is "Diligently" trying all available vendors, holding loan officers at gunpoint until they approve or sending in a W2 when asked?

Originally posted by @Brian Pulaski :
Originally posted by @Tyler Mullen:

If your sale failed because the buyer didn't bother to get their financing then why can't you keep the earnest money and put your property back on the market?  Isn't that the purpose of earnest money and a deadline for applying for then securing financing?  Maybe only accept offers with higher EM amounts?

I've seen people back out as late as the day of closing and forfeit $50,000 in EM because they "...just didn't feel like closing".  Sure the sale failed, that's a pain, but $50k windfall was pretty nice, no wear and tear like collecting rent anyway.

As someone who has a deal that the buyer got a bank commitment, and all other contingencies met, had my house locked up for 2.5 months, they backed out due to accepting a job in FL and wanting to move. They are fighting the EMD. Good luck expecting someone to just hand the money over... I assume most people right or wrong will fight for it. Unless released by either party that money sits, no matter how right or wrong either side is!

The best bet is to stay on top of any buyer, and vet them as best you can. You have NO control over the appraisal or commitment. You have very little control over title/municipal searches or surveys being done. The seller really has no control over the buyers and how the process goes.

 All I can do is make sure they're preapproved. Which is pretty standard with anyone. Their realtor probably wouldn't even show them houses without preapproval. I suppose if I'm able to keep the earnest deposit, it's some small solace. Their agent told me he had never seen this happen before in his entire career.

Originally posted by @Mike Cumbie :

Diligently persue? I assume you were able to get your EMD then, since your contract did say it?

As long as your lawyer is ready to argue "acceptable effort". 

Is "Diligently" trying all available vendors, holding loan officers at gunpoint until they approve or sending in a W2 when asked?

 They went AWOL from their lender for several days. And never sent in writing reasons why they were unable to obtain the loan, like it said in the contract they had to.

We just both released the contract today after 5pm, so the title company was closed. I have to wait and see how easily they'll give it back to me, if they even do.

Well I'm no botanist but no, it's not all you can do to verify the buyers pre-approval. If the offer has a financing contingency I would be shocked to learn that it also didn't require something to the effect "... application for financing shall be submitted to the lender within X days." Shall is the key word and you as a seller have every right to demand a buyer prove application was made by agreed date, if they refuse then that's ball game folks. That's pretty boilerplate in MLS forms. (Side note here, attention people that say "agents aren't worth their commission", I guess that's a matter of perspective. :):) )

“Diligent” or any other adjective, most of us would be able to make an application on time as agreed with a lot less than diligence...  “making application” is a standard thing, lenders confirm it all the time.  It’s a light switch type event, on or off.  I can diligently turn the light off or lazily or laughingly or aggressively, here’s one for Mr. Trench, flippantly turn off the light, the qualifier is not relevant.  The state of the light, on or off, by date X, is a provable matter.

Tyler Mullen, CFE

@Tyler Mullen

"application for financing shall be submitted to the lender within X days"

His did say that and the buyer did make application within the time frame.

"(i) Buyer shall make mortgage loan application for the Financing within _______ (if left blank, then 5) days after Effective Date and use good faith and diligent effort to obtain approval of a loan meeting the Financing terms"

The problem is that his buyer never "finalized the loan"

With what he posted (not knowing timelines) the fact he choose to terminate the contract as "Seller"

(v) If Buyer fails to timely deliver either notice provided in Paragraph 8(b)(iii) or (iv), above, to Seller prior to expiration of the Loan Approval Period, then Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained, provided however, Seller may elect to terminate this Contract by delivering written notice to Buyer within 3 days after expiration of the Loan Approval Period.

(vi) If this Contract is timely terminated as provided by Paragraph 8(b)(iv)(2) or (v), above, and Buyer is not in default under the terms of this Contract, Buyer shall be refunded the Deposit thereby releasing Buyer and Seller from all further obligations under this Contract.

It looks like his contract  says if the guy didn't provide the Loan approval the contract continues as if it was received. However the seller has the option of cancelling and refunding the deposit (Which looks like what happened here).

DISCLAIMER: I am not a lawyer, don't play one on TV and have zero firsthand knowledge of the contracts used. Any information/analysis is for entertainment purposes only and to foster discussion. No action should be taken on anything I post by inhabitants of planet Earth or any other celestial body. Always consult an attorney regarding legal matters.

Originally posted by @Patrick Philip :

Last time, I had buyers that were preapproved and simply never went back in to finalize their loan. They stopped responding to their lender and agent for several days and the deal fell through. Technically, they never obtained loan approval (a contingency of purchase) so the contract became invalid. Not because they were unable, but because they decided not to after taking my house off the market for over 1 month.

Per the followup post from OP, the buyer was "preapproved" and then "...never went back in to finalize their loan."

In my experience I've kept EM after that set of facts occurred with financing contingency, no big deal. Maybe OP just lacks confidence in his docs or needs to review with their attorney to ensure they understand, perhaps an inexperienced escrow or OP doesn't want to be a jerk about it, he's looking for advice on BP about the nuances in this "grey area" and wants to be professional but without being taken advantage of by what sounds like from his description to be buyers acting like clowns.  Maybe he has never decided to assert a claim to EM so he's nervous, we get that.  What I think maybe he didn't realize is there's likely no need for new fancy wording and elaborate clauses referring to diligence, basically his scenario as stated seems to me to be the same cake already on his plate which he was then asking if he could eat.  No need to reinvent the wheel.

The truth is, a "preapproval" may be issued by a lender utterly irrespective of an "application".  Preapproval may be issued either before or after the application has been completed.  Buyers commonly have 3, 5, 34 preapprovals from any number of lenders for any number of loan amounts.  "Application" by date X is a provable event.

Originally posted by @Tyler Mullen :
Originally posted by @Patrick Philip:

Last time, I had buyers that were preapproved and simply never went back in to finalize their loan. They stopped responding to their lender and agent for several days and the deal fell through. Technically, they never obtained loan approval (a contingency of purchase) so the contract became invalid. Not because they were unable, but because they decided not to after taking my house off the market for over 1 month.

Per the followup post from OP, the buyer was "preapproved" and then "...never went back in to finalize their loan."

In my experience I've kept EM after that set of facts occurred with financing contingency, no big deal. Maybe OP just lacks confidence in his docs or needs to review with their attorney to ensure they understand, perhaps an inexperienced escrow or OP doesn't want to be a jerk about it, he's looking for advice on BP about the nuances in this "grey area" and wants to be professional but without being taken advantage of by what sounds like from his description to be buyers acting like clowns.  Maybe he has never decided to assert a claim to EM so he's nervous, we get that.  What I think maybe he didn't realize is there's likely no need for new fancy wording and elaborate clauses referring to diligence, basically his scenario as stated seems to me to be the same cake already on his plate which he was then asking if he could eat.  No need to reinvent the wheel.

The truth is, a "preapproval" may be issued by a lender utterly irrespective of an "application".  Preapproval may be issued either before or after the application has been completed.  Buyers commonly have 3, 5, 34 preapprovals from any number of lenders for any number of loan amounts.  "Application" by date X is a provable event.

Actually, I just didn't read the original contract carefully enough. This "contingency" I was looking for was already there. If I had been aware, I would have called them in Default and kept their EM after 5 days with no problem.

Apparently, all these contingencies I was looking for already existed. Except for ONE...

What should I do if the Buyer's purchase is contingent upon them selling another property they own? What is the way to keep Buyer's from wasting my time in that scenario? Because in that case, then I'm not only relying on them, I'm also relying on the person buying their house.

Should I keep there offer in backup position until their house sale is final? If so, when do I move it up to primary position? And what if their agent wants to set everything up so they both close on the same date.

This contingency also already exists, stand alone sale contingency or as part of a financing contingency, wording varies.  Most buyers can't qualify for a loan and make the down payment if they don't sell first, right?  Some people can swing two payments but not normally.  You'd simply ask them to release their sale contingency or you'll have to sell to the new non-contingent buyer.  

That's just the way it is.  You should not feel pressured or guilty about it, this is totally business as usual.  As another person posted before, if you as a buyer want the property then the fewer contingencies the better, all cash, no inspection, close in a week... that gives no time for a second buyer to come along.

How do you prevent your time being wasted? First, get backup offers and tell the buyer you're doing that. Keep having open houses, get those buyers through! Second, tighten up your closing dates. My local market is hot, a 30 day close on a typical SFR would be like 2-3 standard dev beyond the mean. Third, as the dates of these contingencies occur make sure that you ask the buyer to release them. If you don't do that at all they will see you're not paying attention. Inspection is typically 10 days... so Day 11 after inspection countdown starts, request the release! Fourth, call to verify that a "preapproval" document is real. Fifth, get after that EM deposit immediately! Sixth, make sure from the lender that the buyer actually applied within the required time. Independent verifications! You gotta be all over them like me on chocolate cake!

As far as the issue you might have where you may be using language in a contingency in your contract but where the contract continues regardless what happens, you need to review that with council then because that isn't really a "contingency".  If there is no provable event and no actual consequence then there's no point to it.  I don't think anyone should be expected to wait 30 days before they hear word one about a buyer actually submitting a full and complete loan application.  And if X isn't done by date Y, but then your contingency doesn't kick in with a consequence, then why have it at all?

What buyer would be fine with word one about proving marketable title until 3 minutes before closing?  No, if the seller doesn't provide it within usually 5 days, the deal is off if the buyer wants to because then it's the seller that isn't serious.  But if there was a 5 day requirement but the buyer had no right to cancel the contract then there's no point to the contingency in the first place.