What's the point of having mortgage contingencies?

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What's the point of having mortgage contingencies?

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Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes

So my buyer was denied his loan after BofA (Bunch of @$$ho13z) screwed up his loan application and delayed the closing for three weeks. After he did everything they asked for and demanded. They even emailed him that the loam is approved and then yanked it because they resent the file to a different underwriter. Long painful story short, the deal is dead. Now even the seller's attorney is refusing to give back his deposit and 20% down payment! How is this possible?! It's not the buyer's fault and there is a mortgage contingency in the contract! The seller's attorney even works as a judge in his small municipality! Can anything be done to make this right short of litigation? I feel terrible for the buyer who lost all his money on title, survey, attorney fees and to add insult to injury, a sleazy judge/lawyer who defies contract laws! Should I be surprised this happened? The seller's attorney gave us nothing buy grief all along the way and even told the seller "I told you something like this might happen when the buyer has to get loan approval. Shoulda sold to a cash buyer." hello?! I bought a cash buyer for 15k less than seller wants and when she wanted more, I found this buyer who is will g yo pay the price but needs the loan to make it happen. Who else ever heard of something like this? Unbelievable!

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y

First, if his financing contingency extended through now, he should be able to use the fact that his loan was denied to back out of the deal and retain his earnest money. But, it sounds like that's not the case, so my question is, why not?

Second, I'm a big believer in controlling your own deals and doing whatever it takes to ensure that things stay on track. In this case, there are a few things you could have done differently:

1. First, find an awesome mortgage broker and try to get every one of your client's to use him/her. This one action has had a bigger positive impact on our business than anything else we've done. Our current broker has never missed a deadline or had a loan fall through after he pre-approved the buyer. Never.

2. Ensure that there was a financing contingency in place for a reasonable amount of time;

3. Ensure that the mortgage broker had a clear-to-close (not just a loan approval) before the financing contingency was up;

4. Ensure that the pre-approval provided by the broker/lender was actually meaningful. Very rarely do I see a buyer's financing fall through when it couldn't have been predicted upfront had the mortgage broker been honest about the buyer's ability to qualify;

5. Stay on top of the mortgage broker. This is the big thing. You should have been on the phone EVERY DAY ensuring that the loan was moving forward and that the approval would come prior to the financing contingency expiring.

It takes a lot of time and effort to do these things, but this is part of the job, and if you really do these things, you should never have a buyer lose an earnest money deposit again.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y

    First, if his financing contingency extended through now, he should be able to use the fact that his loan was denied to back out of the deal and retain his earnest money. But, it sounds like that's not the case, so my question is, why not?

    Second, I'm a big believer in controlling your own deals and doing whatever it takes to ensure that things stay on track. In this case, there are a few things you could have done differently:

    1. First, find an awesome mortgage broker and try to get every one of your client's to use him/her. This one action has had a bigger positive impact on our business than anything else we've done. Our current broker has never missed a deadline or had a loan fall through after he pre-approved the buyer. Never.

    2. Ensure that there was a financing contingency in place for a reasonable amount of time;

    3. Ensure that the mortgage broker had a clear-to-close (not just a loan approval) before the financing contingency was up;

    4. Ensure that the pre-approval provided by the broker/lender was actually meaningful. Very rarely do I see a buyer's financing fall through when it couldn't have been predicted upfront had the mortgage broker been honest about the buyer's ability to qualify;

    5. Stay on top of the mortgage broker. This is the big thing. You should have been on the phone EVERY DAY ensuring that the loan was moving forward and that the approval would come prior to the financing contingency expiring.

    It takes a lot of time and effort to do these things, but this is part of the job, and if you really do these things, you should never have a buyer lose an earnest money deposit again.

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    15y

    The buyer needs to have an attorney send a letter to everyone involved, including the title company. I would be very surprised if the earnest money wasn't returned.

    1Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    I agree Jeff...more specifically....a demand letter. That may not work depending on how the contract reads though!

    0Reply
  • Account Closed
    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    I did recommend my brokers but the buyer wanted to go with BoA because GE banks there and they promised Jim a good rate. Even 3 weeks before closing I saw he was going nowhere at BoA I asked him to call my guy who told him he could have the loan in two weeks to make the closing, the buyer stayed with BoA figured they just needed "one more thing." plus my broker's rate was slightly higher than he was locked in for. should have known they were just messing with him. After the closing was missed I begged him to talk to my broker again. he kept working with BoA and getting what they asked but in the end he just could not afford to put a new roof on the garage and dheekrock the garage or stupid things like that the bank demanded.

    I just got a call from the seller who wanted to know what was going on. She had no idea what her lawyer was up to. Oh boy.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Lily Chen:
    After the closing was missed...

    So, your buyer is now past the contractual closing date? That almost certainly means he is out his financing contingency period. Which explains why the seller expects to keep the earnest money.

    Personally, if I were the seller and the buyer and buyer's agent had me take my house off the market for a month or more and then couldn't get their loan closed, I'd keep as much money as possible too.

    Sorry to be blunt, but this is your fault. How are you not aware of the fact that the seller is entitled to the EM when your buyer failed to live up to his contractual obligations?

    If you're surprised that the seller is entitled to the earnest money, then clearly you never told the buyer that there was a risk he'd be losing his money -- I can promise you that he would have been more open to your suggestion of another broker had he been acutely aware of the risk that he'd lose his earnest money. It was your job to make him aware of this risk, and to do whatever it takes to ensure that didn't happen.

    There is no reason the buyer's financing contingency should have expired without having a clear to close or an extension to the contingency.

    Sorry if this isn't what you want to hear, but as an investor who sells houses, there is nothing more frustrating than having to take my houses off the market for extended periods of time -- and then taking my buyer's money -- just because the buyer's agent didn't do his/her job very well.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    Sounds to me like the guy should not have been buying that hosue anyway. If he didn't have money for repairs, even if he had gotten the loan, he would have had a property needing reparis and no money to do it, especially a roof that gets worse in time.

    That's one of the purposes of lending contingencies, not only does the appraisal protect the lender, it also protects the buyer.

    I don't know what the area is like where you are or how many Realtors there are, but a little publicity about a sleazy attoney can do wonders when it's done properly. It's politics. Take you buyer to an attorney and make the demand and follow the advice given. Make sure the title company knows so that funds are not given to the seller.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Financexaminer:

    I don't know what the area is like where you are or how many Realtors there are, but a little publicity about a sleazy attoney can do wonders when it's done properly. It's politics. Take you buyer to an attorney and make the demand and follow the advice given. Make sure the title company knows so that funds are not given to the seller.

    Wait, why shouldn't the seller get the funds?

    See my post above yours. If the buyer missed the contractual deadline for closing (and therefore almost certainly was outside the financing contingency), why should he get his money back?

    The seller likely took the property off the market for a month or two, lost an opportunity to find other buyers, had holding costs, etc; the seller has every right to be paid for his lost time, money and opportunity.

    If it were me, I'd keep the EM in a heartbeat (unless the buyer was using my broker, in which case I'd give him his EM back and fire my broker)...

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  • Account Closed
    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    I admit I probably should have followed this more closely. I am juggling many duties and I suck at follow up. However the buyer has his own attorney and he was represented and I'm sure attorney explained everything better than I could have. They had two addenda to the contract the atty review took nearly three weeks. Surely someone would have told him the risks. I practically offered to pay for a new loan application fee and he wanted to stick it out with BoA. He has put down 20% and rehab 4 houses before trying to buy this one. He never had problems like this. The house was fsbo and I was transaction agent, and I tried to do everything to help both seller and buyer come together and take care of CO and inspection etc. Like I said I found cash buyers for the seller but she wanted more$. Short of buying the house myself I don't know what more can I do to help these people out. Seller has no idea what happened because her attorney doesnt even return her calls. I am sympathetic but I can't force the buyer to use my brokers and I can't force the seller to drop the price to atrract a cash buyer.

    I am asking other investors if they are interested and having my rehab loan guy take a look at the appraisal to find a loan for my buyer, but at this point the buyer is hitting a stone wall and he is very unmotivated to proceed with the purchase.

    I do appreciate your advice and I will make sure in the future the buyer uses my own brokers. And stay away from BoA. :(

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    True Jason, if they missed it, then they messed up. Maybe I missed that, if they are within the contract terms and the buyer is due the EMD, don't let that judge/attorney intemidate the title agent and disbuse funds.

    1Reply
  • Paul B.
    Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
    15y

    I have little to add to J. Scott's excellent replies, but here's what I have...

    First, you need to know what lenders will do what kind of loans. You probably should have known that BofA was not going to take any collateral that even had a whiff of needing repairs. To my knowledge, they are just not in that business. You might have pressed your client a little harder and told him that, despite what he thinks, BofA is not the lender for him.

    Second, why on Earth is any buyer putting 20% into escrow? The only thing that should have been at risk here was earnest money, and that should have been as little as $50 or maybe $500 to $1,000. You don't put 20% into the hands of the settlement attorney; you bring it with you in good funds at closing.

    Hopefully there's a distinction in your contract between earnest money and the down payment. I can see your client losing earnest money (that's what happens when closing comes and goes and you don't show), but 20% of the sales price as damages is not reasonable. If that's how the contract reads, though, that's how it's going to be.

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    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    The buyer and seller were both very aware that the house is a rehab property and he is buying as-is with the full intention of fixing it up and nobody dispute that. The bank kept changing Their demands and when he addressed them the bank went back and resubmitted to a new underwriter. I'm sure buyers lawyer has been in contact with the sellers lawyer and if they didn't have some kind of extension in place, we wouldn't still be here after 3 weeks trying to get the loan approved. I'm not a lawyer but it seems if the buyers lawyer can't even take care if this what else us there for me to do? The seller had sat on the property fir 2 years, it was her mothers estate and she did not want to list the house because of the condition and she was hoping for a cash buyer to come along and pay top dollar for it. The buyer is rehanging the home so why should he put a new roof on it only to tear it down in a few months? The bank is fully aware of his Intentions and like I said they originally emailed him saying it's good to go and then changed their mind. Clearly something us not right here but I don't know what it could be. I am still trying to salvage this deal and I hope I have good news to report soon. Gotta have hope. :)

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    HOLY COW! 20% EMD? It's too late now to say never put 20% down as an EMD.

    A FSBO? Might ask the buyer's attorney about seller's disclosures required in your area and if they were made.

    Sorry to hear this with you getting out of the gate in the business, it's a learning experience.

    1Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    i'm confused.....where are you in this transcation? are you the buyer's agent? if so, you wrote the offer and contract up, and so you should know exactly what happens when your buyer doesn't perform..i understand you're frustrated, and im' not trying to come down hard on you....i'm also curious why yall put the full 20% upfront as EMD on a FSBO that's been on the market for 2 years?

    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    15y

    You said you are horrible about follow up. Isn't follow up your job?

    If you are new then your broker should be more involved.

    Fully analyzing your transaction going in and anticipating problems is what will make your transactions go smoothly. That is supposed to be your expertise.

    This is a rehab property but the buyer can't afford repairs? What was the plan here?

    Banks want their security to be in good shape. Rehab loans are a little different animal than what is typical.

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    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    The buyer CAN afford the repairs but he can't make those repairs if he DOESN"T OWN THE HOUSE yet. Would anyone here pay to repair a house he doesn't own? If so can I have your number?

    He already paid for the termite inspection and treatment, I paid for the smoke alarms and CO detectors and the permit fee to get the town inspection.

    I don't know what the actual amount escrowed at the seller's attorney is because they changed a bunch of things in the addenda. I could read it over and find out but this is what the buyer told me over the phone.
    If the seller's attorney wanted to kill the deal and keep the money he could have done it 3 weeks ago right after the closing. I don't know what went down because I was not involved with the attorney's discussions and I'm only hearing about these from the buyer when I called him over the course of the deal. I tried to follow up at least once a week. When I say I suck at follow up I meant I didn't stay on it every few days like I probably should. But the buyer always assured me that he's working with the bank and doing what they asked, so I had no reason to think the extension was not at least agreed upon by the seller or her attorney. Like I said the seller had no idea what's going on. She kept waiting for the call to say we're closing.

    I'm a transaction agent in this deal. I don't have a listing agreement with the seller because her attorney refused to have her sign a listing, and only agreed when I brought the buyer to have my 3% added to the purchase price, if and only if he closes, so even if I get another buyer I probably won't see a dime, but like I said I wanted to salvage the deal and at least try to help sell this house so the seller can move on with her life.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Sounds like you're closer to a listing agent that a buyer's agent. Do you have some agreement with the buyer?

    Sounds like you agreed to a contingent agreement. If you found a buyer, you got your 3%. You found a buyer, but they didn't perform. The didn't meet their contingencies, either, so they lose their EMD. If they agreed to put up 20% as EMD, they're going to lose it.

    You're not going to get paid because you didn't bring a performing buyer to the table.

    Is this the same deal with the bird dog who changed their mind and wanted more money? If so, then at least you don't have to pay them.

    The big underlying problem here seems to me to be with the buyer. They tried to use a conventional loan for a rehab project. That's just not going to work, unless its a lipstick project. If this one needs a roof, its more than lipstick.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Lily Chen:
    I'm a transaction agent in this deal.

    What does that mean?

    Who (if anyone) do you have an agreement with? Who (if anyone) do you have a fiduciary responsibility to?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    Jason, Transactional agents don't have a fudicary responsibility to either party they are simply acting to facilitate the transaction and must have a transactional agent contract with disclosures with both parties. Not all states have transactional agency.

    I can see that as both parties were represented by their attorneys.

    I wonder too, when the OP said she added three per cent to the sale price, did you add it or did you divide the required sale price by 97% for the commission, that's just an indication to me of the attorney paying attention.....

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    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    The seller wanted at least $200k. The buyer wants to pay no more than $200k. Seller didn't want to pay commission. I got the buyer agree to pay me 3% of that which is $6k. The buyer has to add that to the purchase price and get the loan on it. So technically it's a flat fee of $6k not a real percentage. In NJ all real estate commissions are negotiable.

    The seller's attorney wanted me to draw up an agreement stating to the effect that the buyer will pay seller $206k and then seller will pay my brokerage $6k out of the deal and netting $200k. And only for this buyer; any other buyer would have to be separately agreed to.

    I bet he charges more than $6k for all his legal services and in handling this estate. Even the seller thinks he's dragging this out so he could rack up his bills.

    Isn't the attorney supposed to look out for his client's interests? How is it in her best interest to be stuck at a run down house for so long? If I was the attorney I would ensure the seller sells as quickly as possible and try to work with the buyer.

    As for ficudiacy, no I am not representing either party. I know agents who supposedly represents either party, would get a signed contract and then sit back and wait for the closing and let the seller or buyer and their attorneys take care of everything else. I would hope I had done more to deserve my commission but in the end there is only so much I can do.

    I do appreciate everyone's perspective and it helps me think of planning ahead more carefully. But if everyone had to pay cash for houses the real estate market would be a very quiet place.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Financexaminer:
    Jason, Transactional agents don't have a fudicary responsibility to either party they are simply acting to facilitate the transaction and must have a transactional agent contract with disclosures with both parties. Not all states have transactional agency.

    Ah...gotcha...thanks for the clarification Bill!

    This makes more sense now...

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    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    i never heard of transcational agents either...thasks bill

    now bank on topic, certainly it's easier to blame the big bad bank of america..however, you have admitted there are things you could've done differently for a better outcome...the buyer also could have performed better...last week i thoguht i may lose my 10k EMD for a flip, and so right away, i switched to a hardmoney lender I've done business with in the past who can close in 2 days...the buyer certainly could've switched from BOA if he wanted so part of the responsibility lies with him as well...I'd do what i can to get some earnest money back, and/or ask for an extension and get the buyer to another bank...other than that, this is a lesson learned...i wouldn't expect this buyer to use you as a transactional agent again either...

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    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    Thanks for the vote of confidence BryanA. :) As a transaction agent, I am not bound to either party, but I have treated all parties honesty and tried to help to the best of my knowledge and ability. I have a good rapport with the buyer so if he ever buys again, even if he didn't want to use me, he can't say that it's my fault because I didn't make him give 20% to the escrow and I didn't force him to stay with his Bank. I am still trying to get him to talk to my rehab loan guy and finding another buyer for the seller. But yeah, hindsight is so much clearer. :)

    2Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    Not to drill too deep on that commission, but having it as a flat fee was fine, but if the attorney asked to add 6K for a commission, the seller would be paying commission on the amount addedto pay the commission, your seller should divide the 200K by 97% or 206,185.57, that nets 200K after commissions. And that would indicate that an attorney is not on top of the game.

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  • Jake Kucheck
    Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
    15y

    So... I'm not sure how contracts are written in NJ, but I know in CA there is a liquidated damages clause that says in the event of cancellation due to the buyer breaching the contract or being unable to perform, the seller is entitled to whichever is LOWER of the EMD or 3% of the purchase price.

    So- if you have anything similar in NJ, only 3% (or your analogous %) would be at risk, not the full 20%. I'm guessing you don't know if this is in the contract or not, but you'd better look. The rest of the 20% would be returned to the buyer once both parties mutually agree to cancel escrow. Again, in CA, if there is not a mutual agreement, the money stays in escrow until there is a mutual agreement, and after 7 years of "standoff" is given to the state of CA. I've only been in real estate for 4 years, so I've never seen this happen, as usually buyers want what's left of their money to go screw up some other seller's escrow with their non-performing lender.

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    OP
    Involved In Real Estate · Paramus, NJ · Member since 2009 · 95 posts · 40 votes
    15y

    Heh. The seller's lawyer even asked ME to write it up. Methinks real estate is not his primary practice area.

    Looks like the contract says 10% deposit is held and another 10% at closing. So the buyer is out $20k plus the $5k of all the fees, inspections and treatments he had ordered up to this point.

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