Earnest Money - Posted by Gail Reinwald

import · September 14, 2006, 1:06pm

Posted by Barry on September 26, 2006 at 24:08:49:

Frank,

Thanks for outlining the details. I appreciate you taking the time to do it. Since it was one of your first deals, I think it?s fair that we say we all learn from experiences.

You asked under the circumstances if I would refund the entire deposit. I asked myself the same question after reading your post and came to the conclusion that I still don?t have enough info to make a decision. In my original reply, I was under the mistaken impression that this issue happened during a time you were already a successful RE investor, who had the money and discretion to deal with the matter. I apologize for making the assumption.

Having said that, I think the whole deal boils down to common mistakes committed by a newbie. A flipper who didn?t have a backup plan when the first one failed. Under the circumstances, I think you did what you believe to be proper. I hope I will never come to face a similar situation under similar circumstances.

Wish you the best,
Barry

import · September 14, 2006, 1:06pm

Earnest Money - Posted by Gail Reinwald

Posted by Gail Reinwald on September 14, 2006 at 13:06:30:

We had a sales contract on our house. Both realtors confirmed that we as the sellers had performed to contract specs.

Buyers did not close. One of the buyers became ill and passed away the day after the scheduled closing. Spent $800 to update house per their requests (not repairs).

We as sellers received no notficiation from their real estate broker that they did not intend on closing.

Do we have any rights to the earnest money?

Thank you
GDR in Missouri

import · September 14, 2006, 11:20pm

Re: Earnest Money - Posted by BTI

Posted by BTI on September 14, 2006 at 23:20:03:

Gail

Join the human race and return the deposit along with your condolances.

BTI

import · September 14, 2006, 1:50pm

Re: Earnest Money - Posted by Frank Chin

Posted by Frank Chin on September 14, 2006 at 13:50:47:

Gail:

To me, there’s two issues

Are you entitled to it according to the contract.
Can you get your hands on the money if you’re right.

Let me explain my experience.

I flipped a house to a buyer, who paid a $12,700 earnest money deposit. There is a “mortgage contingency” where he can walk away if he didn’t get the mortgage.

Long and short of it, he got the mortgage, a week before closing, he lost his job, he told the bank, the mortgage was withdrawn.

My attorney’s take is the contract said “as long as they got the mortgage”, says nothing about the bank withdrawing the mortgage, therefore, I keep the money.

Buyer’s lawyer claims that a withdrawn offer is the same as “not getting the mortgage”.

So, what happens??

After a 3 month impass, my lawyer, also the escrow agent, wrote both of us a letter saying he’s turning the funds over to the court, till such time we decide what to do. He explains that for him to release the funds “both sides must agree”. Since neither side agrees, NO ONE gets the funds.

How did I play it??

Well, the man is out of work, and needs the money. His lawyer called, and threatened to sue. But I told the lawyer since I don’t need the money, I’ll drag it out a few years, and the whole escrow will be wiped out by legal fees.

What did we agree on??

I told the lawyer I’ll have to close on it, pay about $8,000 in closing costs, and close again when I sell it. With that, we agreed that I keep 2/3, with 1/3 going back to the buyer.

Depending on how the escrow is held, based on my expereience, neither will get the money back if neither side agrees on things, which means if you split it 50/50, it’ll be quicker and fairer.

If you feel your entitled, and they say “no way”, then both of you would have to settle it in court.

I feel bad that the guy is out of work, and you must feel bad one of the buyers passed away. But, business is business, and why should you and I suffer.

Frank Chin

import · September 15, 2006, 5:45pm

Re: Earnest Money - Posted by Barry

Posted by Barry on September 15, 2006 at 17:45:58:

Frank,

First let me say I enjoy reading your posts. But don’t you think your “business to business” approach is a little harsh in this case?

Would you handle differently if the buyer is your friend or relative?

It seems in your example the buyer did have a ligitimate reason to cancel although you have the money to keep the money so to speak. I wonder what the buyer would do if he has the money to flight you in court. And if he does, would you still go to court for this?

Thanks
Barry

import · September 15, 2006, 6:23pm

Re: Earnest Money - Posted by Frank Chin

Posted by Frank Chin on September 15, 2006 at 18:23:43:

Barry:

I guess every situation is different, and some can AFFORD not to be harsh.

I rehabbed the property, flipped it to the buyer, and my original contract expired, because the buyer took so long, and the seller wanted to close PRONTO, and does not want to hear what happened to the buyer. Buyer lost his job is not his problem. He had some loan sharks to take care of, and I got 10K tied up rehabbing his place, where the contract expired on me that I have to take care of.

Actually I got a good laugh when Charles Parrish, the RE guru, questioned me if “I knew the benefits of being able to renovate a property that I control and do not own”. Yeh, I know it well.

Being a nice guy was the last thing on my mine at this point.

So I had to close on the deal, costing me $8,000 extra, and then sell the place, and close on it again. So this is strictly business. And the fact that the seller, and buyer were both idiots was also part of the equation.

My attorney did tell me that some sellers, collecting earnest money, such as someone retiring to FL, has no problem saying, OK, let the money go, and I can spend another 6 months in NY waiting for the next deal to fall thru.

In cases where someone is selling to buy his home for a job relocation, and counting on the sale of this home to close on the next one, is he going to say “OK, it’s messed up, I’m a nice guy and I’ll refund the money”, and meanwhile HE CAN LOSE his own earnest money on the place he’s buying, because he can’t close. Is he going to say to this out of town seller “I was a nice guy, and you have to be a nice guy too”

As to the buyer fighting me in court, his lawyer DID threaten to sue and said he’s a high price RE lawyer costing $200/hour at the time. I wanted $8,000 to cover my losses.

I asked him how many hours he plan to spend to get the whole $12,700, versus just getting $5,700. I was in the collection biz, and I knew it’ll take him more than 40 hours of work (40 x 200 = $8,000) to horse around with me, and wait a year or more to boot.

He folded up right then and there, and agreed to it if his client can get the money right away.

My attorney told me that usually in these case, they recommend 50/50 if it looks like litigation is necessary, to avoid legal cost. He told me before hand the opposing attorney was of the same view. Based on this is a $6,350/$6,350 split to begin with.

So when I asked for $8,000 to cover my cost, it wasn’t far off the mark.

Frank Chin

import · September 18, 2006, 12:39pm

Re: Earnest Money - Posted by Barry

Posted by Barry on September 18, 2006 at 12:39:47:

Frank,

Thanks for taking the time to shed light on the background.

At this point, without knowing other details, I would only say I sympathize with your buyer as $8K is a lot of money for someone who?s just lost his job.

Regards,
Barry

import · September 21, 2006, 9:24am

Re: Earnest Money - Posted by Frank Chin

Posted by Frank Chin on September 21, 2006 at 09:24:48:

Barry:

Thanks for the time commenting, and I often think of this deal thru the years, and had few people to bouce this off of. So, it’s kind of therupeutic for me.

During this process, we emphasized to the buyer that I’m a RE investor, selling it to him as a “contract vendee”, rather than an owner. When the problem arose when he “lost his job”, we sympathized with him, but told him we’re NOT the “homeowner” that just lost everal months time, and had to start all over over, but an “investor” with a seller breathing down his neck, with the seller having problems of his own. Liquidated damage clauses are not written in to look pretty.

Problem also was, I also had problems of my own.

At the time, I quit a job to do full time RE, and looked for deals that I can rehab, or flip.
These deals are difficult to find in the NYC area, but I managed to find this one for 80K, 10K rehab while under contract, and ARV about 130K.
Signed the contract in Dec, around Xmas that year, rehabbed done in Jan, slow season. One buyer fell through, second buyer signed contract in April, the buyer in question.
My contract with seller calles for closing by June 30, I advance funds to pay his mortgages, gettin paid back at closing when flipped.
My contract with buyer calls for closing by end of July. Got extension from seller, to the end of Aug and I’m responsible for his mortgage payments as of Jul 1.
Everything appeared on track till the last week of August, closing scheduled, I spend 10K rehabbing, paid the seller’s mortgages since Jan, and I was going to get that paid as well, and I borrowed against credit lines to advance some of those funds.
The buyer was a pain, with closings constantly postponed, and finally “I lost my job”.
And here I was, doing this full time, told the wife, “don’t worry, everything is taken care of when we close” Remember, between the rehab, paying the mortgage for the seller, I’m way out on the limb.
And what was the seller’s problem?? He had a first mortgage, a second SBA loan, couldn’t borrow any more from the house, so he then borrowed money from loan sharks, that he counted on the pay off when the house is sold. He said “Frank, the loan sharks don’t want to hear me explain to them that MY BUYER’s BUYER LOST HIS JOB”. He was a raving maniac at this point. He said “they promise to break my legs if I don’t pay them”.
And we got him to extend the contract unofficially by telling him that we can close on it faster than anyone else.
While I hung tough with my buyer, saying “you need the money more than I do”, my wife was not in a good mood.
The other problem?? My contract with the seller was ONLY for 80K, and the bank was only willing to do an 80% loan, even though the VERY same bank approved an 80% loan to the buyer for his 127K purchase price. Yes, the loan officer said it makes no sense, but rules are rules, and the loans granted is based on two different contracts.
Because I can’t finance out, I was stuck with about 20K in short term loans, where the 8K coming back would be a big relief.

Barry, I don’t what you would’ve done. Fortuantely it took us two years to dig out of this hole, forced us to live under our means. Had I given all his deposit back, it’ll be spaghetti dinners for yet another year.

And that was on top of some bad vibes I got from the buyer at our first sitdown meeting. I’m Asian, and he gave me a funny look. His attorney asked him if everything was OK. He said “oh, sorry, I got flashbacks to Vietnam …”

All, in all, I was not in a charitable mood when all of this came up.

Don’t know if you’re married, if you’re married, in a hole for 20K, try explaining “let’s give him all his money back because you feel sorry for him”. In my case, she’ll say “didn’t you say he’s an idiot PLUS a BIGOT”??

Unfortunately, the answer is yes. Under the circumstances, would you have refunded the ENTIRE deposit??

Frank Chin