Ridgewood, NJ · Member since 2012 · 23 posts · 0 votes
I know this topic is well-discussed, however I'm having some trouble understanding the whole deposit thing.
I found a good deal where the seller wants me to pay 5k deposit and 35k after attorney review with no inspection really, i.e. AS IS.
I'm sure I can make money holding this deal if nothing else. I don't want to rush but I don't want to get cold feet either. It's a promising location, and fair deal.
Is there anyway to have at least Some kind of escape in case I need to so I don't risk losing the 40k by signing the deal? What are some techniques for backing out of an AS IS deal with your deposit?
As-is generally means the seller won't make repairs -- it doesn't necessarily mean you can't do inspections (that's up to you and the seller to negotiate). As for your deposit, whether you have any contingencies determines if that is refundable or not and for how long.
Generally speaking, "as is" doesn't mean no inspections and no contingencies, though a lot of people interpret it as such.
What's preventing an inspection before you make your offer? Is the property vacant? I'm one of those sellers that require large earnest money deposits and there are no contingencies in the contract. But I expect the buyers to do their due diligence before they make an offer. Accepting offers that have inspection contingencies, especially on low valued (read "entry level") rehab properties, gets really old really fast. So, I don't do that anymore. :)
I agree with K Marie. Conduct your inspections before making your offers. But it sounds like you may be new thus you may not have ready access to the professionals you need to pull the trigger fast. Thus, I suggest you either A)get access to those professionals fast or B) at least bring in a general contractor and include in your contract that you agree to buy 'as-is' providing there are no structural or environmental issues (ie toxic mold) with the property.
Basically you're telling the owner "yes I have no problem buying as is providing there are no serious issues I'm not able to detect with my or my contractor's inspections.
I wouldn't put up $5k on an 'AS IS' property unless it is $5k that you're ok to lose if you chose not to purchase. It sounds like there are Zero contingencies...
Wow, thank you all so much. Extremely helpful. I think I'll go in tomorrow and see if I can
1) decrease the deposit due to it being as-is (suggested by my "partner")
2) add "no structural /environmental issues"
@Jon: All cash 3 family. Not a screamin deal, I just want to get started and suppose it's a good enough deal.
Your seller might be smelling blood in the water. Let's say he has an offer lower than yours, but is confident that the deal will close. Then he has your higher offer, but they sense that you are new to the game so they aren't so confident that you will close. To mitigate the risk that you might walk away, they ask for a high deposit and an offer without contingencies. If you back out, they keep your money then sell to the other guy. If you have to put in a big deposit without contingencies, it had better be a screaming deal.
As-is generally means the seller won't make repairs -- it doesn't necessarily mean you can't do inspections (that's up to you and the seller to negotiate). As for your deposit, whether you have any contingencies determines if that is refundable or not and for how long.
Generally speaking, "as is" doesn't mean no inspections and no contingencies, though a lot of people interpret it as such.
As-is generally means the seller won't make repairs -- it doesn't necessarily mean you can't do inspections (that's up to you and the seller to negotiate). As for your deposit, whether you have any contingencies determines if that is refundable or not and for how long.
Generally speaking, "as is" doesn't mean no inspections and no contingencies, though a lot of people interpret it as such.
J Scott, which RE school did you go to? You're absolutely correct. As-is only means seller won't make any repairs. That's it.
I don't know about New Jersey, but good luck trying to keep MY deposit on an As-Is sale with no contingencies. It ain't that easy baby. :)
As J Scott wrote waiving inspection and buying AS IS are two different things. You will need to clarify that with the buyer. You can also get it inspected beforehand. A lot of inspectors do a discount inspection that just covers the big ticket items (structural, roof, AC, etc). I pay mine $150.
Where I am, escrow will not disburse most earnest money funds without written consent/agreement from both parties. Escrow isn't in the business of analyzing contracts and contract law, so they don't take that risk. So if a buyer doesn't perform, it's not like the seller gets the money the next day. The funds could sit there a long time if no agreement is reached.
My contract states that the earnest money is non-refundable to the buyer in the case of default. Only serious buyers planning to perform will sign that.
Until reading this thread, it never occurred to me that there could be confusion about an as-is sale versus contract contingencies. The "as-is" part is only about the the condition of real property: as-is, where-is, seller will not make or pay for repairs. So property condition is no longer a contingency in the contract. You have to buy it the way it is.
Buyers should attempt to put in any other contingency they want or need. Contingencies could be anything: marketable title, appraisals, inspections, loan approvals, vacancy, removal of personal property, partner approval, etc. It never hurts to ask. The as-is condition part stays the same regardless of the other contingencies. I say no to most contingencies on a totally as-is deal, but it's always negotiable. Just depends on the deal.
Minh, how do you word your offers so you can get your deposit back if something comes up, I was under the impression if its as-is, no contingencies, seller keeps deposit if you back out for any reason. (other than if seller can't produce a marketable title)
Where I am, escrow will not disburse most earnest money funds without written consent/agreement from both parties. Escrow isn't in the business of analyzing contracts and contract law, so they don't take that risk. So if a buyer doesn't perform, it's not like the seller gets the money the next day. The funds could sit there a long time if no agreement is reached.
Eric C. I'm going to steal the above lines from K. Marie Poe. In CA, the purchase contract is written to protect the buyer. Unless you waive your 3% liquidated damages clause, I don't care if you put 20% earnest deposit, the maximum you will lose is 3%.
If you don't perform, the seller will have to sue you to get your earnest deposit. Seller will have to prove that the damage was done, or they will not get to keep any of your deposit. Say you offered $500k for the property and backed out right before close of escrow, and the seller ended up selling the property for $500k or more, there is no damage. If the seller sold for less, well there is damage, and it would likely come out of your earnest deposit when we go to arbitration.
In the meantime, your earnest deposit is sitting with the escrow company until the property is sold. If you need your earnest deposit back ASAP, you could easily settle for pennies on the dollar.
It comes down to who understand the contracts better, your agent or the listing agent. I don't know where J Scott and @K. Marie Poe learned their stuff, but they appear to understand the contract extremely well based on what I have read on here.
Just finished having lunch with my broker and this is what he said. There are 9 ways to back out of a deal without losing your deposit eventhough you waived all of your contingencies from the get-go. You can back out based on the Transfer Disclosure Statement; the Natural Hazards Report, the Preliminary Report, etc.
If buyer is in default and not performing, the seller can accept another offer, but cannot close until the seller has released your contract. By releasing your contract, the seller has to release your deposit too. Otherwise, the seller cannot close the transaction with a new buyer.
If the seller countered your offer from the get-go and made the deposit non-refundable, it is illegal and unenforceable in CA. I thought I'd share that from the lunch meeting.
If buyer is in default and not performing, the seller can accept another offer, but cannot close until the seller has released your contract. By releasing your contract, the seller has to release your deposit too. Otherwise, the seller cannot close the transaction with a new buyer.
If the seller countered your offer from the get-go and made the deposit non-refundable, it is illegal and unenforceable in CA. I thought I'd share that from the lunch meeting.
California has some wacky real estate laws...
In my experience, and in my state, if your contract (with you as a buyer) has no contingencies and you don't completely the transaction through no default of the seller, you're going to lose your EM if the seller is willing to fight for it.
As a seller, I always give my buyers reasonable contingency periods (and if they use my mortgage broker and closing attorney, they get a financing contingency through closing so they'll never lose their EM), but if the buyer passes their contingency periods and then wants to back out for some stupid reason, I *will* keep their EM.
If they don't want to give up the EM, I'm happy to let the EM holder assign it over to the courts, file a small claims suit, and let a judge decide. While most judges will be pro-buyer, my guess is that they won't rule in a buyer's favor if the default was egregious (that's been my experience as well with other investors who have gone through this process).
I consider myself pretty fair with buyers -- if they're fair with me, all is good and I'll give them the benefit of the doubt. If they try to take advantage of me, I'll go to the mat...and I will win.
By the way, if I ever default as a buyer, I would immediately give up my EM...I'm not going to fight for money I don't deserve, even if I think I can get it.
By the way, if I ever default as a buyer, I would immediately give up my EM...I'm not going to fight for money I don't deserve, even if I think I can get it.
J Scott, that's the difference. Due to the tight market, listing agents here squeeze the buyers hard. They counter with no contingencies and non-refundable deposit, etc. When we call the California Association of Realtor hotline, the attorney said non-refundable deposit is illegal and cannot be enforced. A buyer can always back out during their due diligence period.
With respect to your second point, it's a matter of principle.
Basically, I was taught that it's almost impossible to keep the buyer's deposit in CA unless the seller could prove damages. However, not that many agents and brokers understand the contract thoroughly. Many agents don't even understand what and "As-Is" sale is.
According to my broker, we recently lost a case where the buyer backed out after all contingencies were removed. We sold the property for slightly more than the previous contracted price. Seller refused to release the deposit upon the buyer's request. We went to court. The judge ruled in favor of the buyer, and the seller had to pay the buyer $1,000 for damages. There's a clause in the CAR contract with respect to this. Weird I know.
When we call the California Association of Realtor hotline, the attorney said non-refundable deposit is illegal and cannot be enforced. A buyer can always back out during their due diligence period.
What if there is an EM deposit and no contingencies in the contract?
Technically, that's not a non-refundable deposit (it's an earnest money deposit), but it looks and acts like one. If that is illegal, how do you legally enforce any contract that has EM and no contingencies?
Btw, I'm not arguing with you -- from what I've heard about CA real estate, this makes perfect sense -- I'm just trying to figure out if there is a legal way to circumvent these crazy CA laws.
Just finished having lunch with my broker and this is what he said. There are 9 ways to back out of a deal without losing your deposit eventhough you waived all of your contingencies from the get-go. You can back out based on the Transfer Disclosure Statement; the Natural Hazards Report, the Preliminary Report, etc.
If buyer is in default and not performing, the seller can accept another offer, but cannot close until the seller has released your contract. By releasing your contract, the seller has to release your deposit too. Otherwise, the seller cannot close the transaction with a new buyer.
If the seller countered your offer from the get-go and made the deposit non-refundable, it is illegal and unenforceable in CA. I thought I'd share that from the lunch meeting
Good CA information here, but it's agent skewed. :) I avoid the CAR contract whenever possible. I've been listing more properties and hence getting more agent offers, so lately I've been dealing with more of this mumbo jumbo.
The goal with my contract isn't to enforce EM clauses, it's to make sure the buyer is ready and able to perform (and not just hoping and thinking about it). I don't keep EM deposits for a living, but I've kept a few when someone has kept my property off the market for 3 months while they think about funding. The defaulting buyers had to agree to release funds and they did.
My advice to the OP is do not rely on unwritten contingencies to protect you. Enter into contracts where both parties agree to and understand all terms, including clearly worded contingencies.
Minh L. Do you remember all 9 things on the list? I'd be interested in seeing them. Thanks!
When we call the California Association of Realtor hotline, the attorney said non-refundable deposit is illegal and cannot be enforced. A buyer can always back out during their due diligence period.
What if there is an EM deposit and no contingencies in the contract?
Technically, that's not a non-refundable deposit (it's an earnest money deposit), but it looks and acts like one. If that is illegal, how do you legally enforce any contract that has EM and no contingencies?
Btw, I'm not arguing with you -- from what I've heard about CA real estate, this makes perfect sense -- I'm just trying to figure out if there is a legal way to circumvent these crazy CA laws.
There was CA case law in 2010 where the decision said EMs can't be nonrefundable if there are no liquidated damages. So, I put non-refundable in the contract, but it's not technically binding. EM can't be released by escrow without my approval and the onus is on buyer to prove I didn't suffer any damages. I feel that is a strong enough position to negotiate with the defaulting buyer for a release of funds to me. Not perfect, but works for now.