Dan Melson: January 2017 Archives

what happens if partner refuses to pay his half of the mortgage?

The lender will hold you each responsible for payment in full. They don't care who pays; only that they get the full amount every month. That's the long and the short of it. You both agreed to the loan contract, and if it's not paid in full there will be all of the consequences: Hits to your credit, notice of default, foreclosure.

This is basically blackmail on the part of your partner but a disturbing number of partnerships have this phenomenon occur. The only way I know of to recover the money is through the courts, which takes forever and costs more money. Even when you have a judgment, it can be difficult to actually get the money if they have taken certain steps to place it beyond your reach. Talk to an attorney right now, keep good records, and send everything Certified Mail.

Unfortunately, there are no method except time that I am aware of to repair the damage to your credit once it has been done. You just have to wait it out. For that reason, it is usually cost effective to loan your partner the money, even at zero percent interest.

What if you don't have the money for both halves of the payment? Well, that's a real question, and the answer is found in the article What Happens When You Can't Make Your Real Estate Loan Payment. This is not a good situation to be in. Talk to that attorney about liquidating your investment. It takes time and a lot of money if your partner doesn't want to.

What can you do to prevent this from happening? Pick a good partner that won't pull this nonsense. Spend the money to protect yourself up front with a partnership agreement (It should protect your partner from you as well). But the fact is that if your partner wants to be a problem personality, you really can't stop them in the short term. Not that it makes any difference to your pocketbook, but sometimes it's not intentional. People do fall on bad times for reasons not under their control.

Corporations are another step people take to protect themselves from this sort of thing, but that brings in all sorts of further problems. How the corporation qualifies for a loan is often a significant problem, and many times practically speaking, is insurmountable.

Borrowing money in partnership with someone else is something to be done with a lot of forethought and preparation, otherwise there's nothing you can do when bad things happen.

Caveat Emptor

Original here

after Katrina I am upside down with my mortgage. my house is uninhabitable. My flood insurance check doesn't payoff the mortgage. How can i get a short payoff due to financial hardship - i.e. relocation loss of jobs and steady income?

This is one of the hard truths about mortgages. They are a contract between you and the lender to pay back a certain amount of money that you borrowed in order to purchase that property. They have nothing to do with any unforeseen hardship, and if you do not pay that money back, in full and on schedule, you can anticipate negative consequences no matter how good the underlying reason. Especially to your credit, and those are going to be long term consequences indeed.

Unforeseen disasters, like Katrina, Earthquakes, floods, fires etcetera, are some of the biggest reasons why things go wrong with your ability to repay that money. Something happens to the property and now you can't live in it, and you do need to pay for housing elsewhere. Furthermore, in widespread disasters like floods and earthquakes, since your job may no longer be there, you may have to relocate a considerable distance away in order to find work, and have difficulty paying your mortgage even if your property, in particular, came through just fine.

There are several issues that trap the unwary or uninformed consumer. Homeowner's Insurance in general is the first of these. Many lenders in other states have requirements that the property be insured for the full amount of all mortgages against the property. This requirement is illegal in California (and a few other states), and actually is counter-productive as this implies that the objective is to pay off the lenders, when the objective of insurance is to repair the damage. The phrase that California lenders look for in the policies of homeowners insurance that any lender can and all lenders do require is "Full replacement value." In other words, the insurer must agree to bring the property back to being in the same condition it was in prior to the covered event that caused the damage. Nonetheless, there are many properties where this kind of coverage is not available, most often due to their location in areas vulnerable to periodic fires. In such instances, you can expect lenders to require significantly larger down payments and charge higher interest rates, if they are willing to lend against the property at all. Since this adversely effects the owner's ability to sell their property, you will therefore likely get such a property for a lower purchase price than you would otherwise - but you will also have the same difficulty when selling it. You should be advised that this difficulty will persist before you purchase the property, no matter how much you have for the down payment. An agent who doesn't tell you about this issue on properties where it is an issue is either incompetent, or not looking out for your best interest.

Another issue with homeowner's insurance is that you must keep the insured amount reflective of your home's current value. If you bought in the eighties here in San Diego, you probably paid about $150,000 for a three bedroom single family residence. I don't know of any single family residences below about $300,000 now, and most are in the mid 300s or higher - let's say $450,000. The insurance companies, quite reasonably I might add, take the position that even if you have "full replacement value" coverage, your home is only insured for $150,000, and is worth $450,000, you are not insuring it for the full value and will not pay the full bill for any repairs even if it is only for $100,000. In such a case, it's been a while since I went over the figures that are the legal basis for the math, but in this particular instance, I get that the insurance company will pay $41,666 out of that $100,000 repair bill in this particular instance. The threshold is legally if you had the property insured to at least eighty percent (80%) of its actual value, they will pay the full bill, but you only had it insured to 33 percent of the value, and therefore they will only pay 33/80ths of the bill. So once every couple of years (more often in markets rising 20% per year!) talk to your insurance company about making certain your property is properly insured. Yes, you'll pay more money, but it is a trivial amount compared to the cold hard fact above. My first property multiplied in value by about three and one half times, and the difference between the insurance premium then and the insurance premium now is less than fifty percent. Some insurers (mine among them) have a good record of not invoking the 80 percent rule I'm talking about here and paying the full amount, but this is a matter of company policy, not legal requirement, and it can be changed at any time and no matter how benevolent they are, if the disaster is bad enough they will have no choice. Furthermore, those folks who keep their coverage updated are de facto paying for those who don't under such a policy, and for those who do make a habit of keeping their insurance coverage updated may find more competitive rates with other insurers.

Two things everybody needs to be warned about is that no regular policy of homeowner's insurance, not even the vaunted H.O.3 policy with the H.O. 15 endorsement, covers against flood or earthquake. If possible flood or earthquake is an issue where you are, you need to buy a special policy to be covered by them. Flood and earthquake policies usually have a higher deductible than a basic homeowner's policy, and the reason for this is simple: solvency of the insurer and price of the insurance. Flood and earthquake are typically widespread devastating disasters that make for major damage over a widespread area. If the deductible was smaller, the price of the added policy would need to be much higher, as paying off such claims strains the financial resources of even the strongest insurer. If you're buying on stable soil atop the highest ridge line for miles around, flood insurance is probably not a worry for you. I sit roughly two tenths of a mile from a creek bed, but the amount of territory it drains is relatively small, only a of couple square miles, as the big watercourses go well away from where I sit and there are large hills between me and them. On the other hand, being in California, I've had earthquake insurance since the day I bought the property.

One more thing with flood insurance: There is a federally mandated thirty day waiting period between application and payment of premium and the time it goes into effect. This is to prevent, for instance, people in New Orleans waiting until there is a hurricane headed their way and rushing out and buying flood insurance, then canceling it and asking for a return of their premiums afterwards. I think the thirty day requirement is waivable to the extent that it can go into effect on the day you buy your property, but talk to your insurance agent.

Now, one final thing to be aware of. The value of the land itself is not insured, only the value of the improvements to that land. If a flood goes through your land, the land will still be there afterwards (and research riparian rights sometime if you're worried it will not be - another thing a good agent should warn you about if it's relevant). So if, like many in San Diego, you bought the property for $500,000, but it only cost the builder $200,000 to put the property together, the value of the land is obviously $300,000, right? Well, your mortgage is for eighty percent or ninety percent of the value of the improvements plus the land. Let's say 80%, $400,000, although I suspect that's on the low side of both mean and median. So when a disaster destroys the improvements (i.e. the home) and your insurer sends you a check to rebuild those improvements, that $200,000 check is obviously not going to cover the full amount of the mortgage. What do you do?

Well, that's where the importance of a good insurance policy, that will cover the costs of housing while you rebuild in addition to the costs of rebuilding the home in the first place, comes in. You'll also need to learn the value and importance of managing cash flow versus amount you may owe, but that's a subject for another essay and you should consult a good professional financial person if you haven't learned this before said happens in any case. Trying to learn that financial skill "as you go" is a recipe for guaranteed disaster. Furthermore, no matter how good your policy of insurance is, there is always a deductible and there are always extra expenses of rebuilding that you need or desire to undertake because it's the best and cheapest time to do so. This illustrates the value of building up and maintaining an emergency fund that you can access, because even if the finished property will be worth far more, no regulated lender will touch a refinance for cash out while the property is still under repair. A "hard money" lender might lend you new money, but they require so much equity in the property "as it sits right now" that this is not an option for the vast majority of all property owners. And in the meantime, you must keep up all payments required under the original loan contract you agreed to. Yes, it's a hardship. But it's what you agreed to do when you signed that mortgage contract.

Caveat Emptor

Original here

I wouldn't have believed this one if I hadn't been there when it happened.

Another agent in my office had a listing where the property went into default. We just happened to find out about it; the seller tried to keep it a secret because they were embarrassed. Silly because default is a matter of public record, but it happens. Suddenly, the sharks started swarming, of course.

One agent brought an offer in. Among other things, that offer called the property, "a dog." It's not a dog. It's not a place where I'd expect to find a billionaire living, but if someone gave it to me, I'd have no problems either living there as it sits, or renting it out.

Never insult a property you're interested in. It's smart to explain the facts of the situation that are in your favor, but calling the property "a dog" conveys no information, is completely subjective, and is usually construed by the owner as a direct personal attack. If you want them to agree to sell you the property - which should be the reason you made an offer - it's a great way to sabotage that goal. If the property has holes in the wall or cracks in the foundation, by all means remind them. Be specific about the faults, but don't get personal and don't make subjective judgments.

Then this clown not only sabotaged his argument, but violated his fiduciary duty, by bringing in a competing offer.

This just blows my mind. Not only is the property now obviously not a dog, since you have multiple people clamoring to buy it. How many buyers can one agent work with at a time, anyway? My absolute limit is six. If two of them want the same property, there must be something pretty darned attractive about it.

This also increases the leverage the seller has, raises the sales price for the one that gets the property, and means that one of them doesn't get the property. How can this not be in violation of fiduciary duty of that buyer's agent?

No matter how good the bargain, as a buyer's agent, I never ever initiate showing a property to someone else until the first buyer has told me they're not interested. I can't stop them from seeing the property, but I can avoid personal responsibility for encouraging someone else to make a competing offer. Especially now - it's not like there's any shortage of bargains out there. Sure, the incidence of multiple offers has risen dramatically, and properties that are priced competitively are moving (both of these are signs of a buyer's market that's about to turn, by the way). Nonetheless, there's a lot of good stuff out there if you know what's really important and how to look. A buyer's agent should know both. That knowledge is a significant fraction of what we're selling. When I originally wrote this, I had found four great bargains, even considering the market, which was the last time I got out just on a general search, not associated with any particular client. All I had to do was get off my backside and out of my office and look. I don't accept clients if I haven't got the time to look for them.

This clown of an agent was thinking about getting paid, not the client's interest. Furthermore, unless he told them, which I will bet he didn't, those two sets of clients have no way of knowing that the agent has hosed both of them. The property was one heck of a bargain as it sits. Either one of them should be ecstatically happy with it and a good bet to come back on their next transaction - provided they don't know how the agent hosed them.

In the case of this particular property, both the MLS and the foreclosure list are public knowledge. It's not like there's any deep dark secret about it. Perhaps this agent is even selling foreclosure lists as a way to procure business, and both clients independently spotted the property and asked about it. He still owes it to the client who put in the first offer to do what he can not to sabotage them. This is the one exception I can think of to Agents Refusing to Make an Offer on Real Estate. As a buyer's agent, I have a firm policy of one outstanding offer per property (As a listing agent, I love multiple offers and do everything I can to encourage them). It's a minor encouragement for fence sitters to pull the trigger now, when I tell them that if another of my clients makes an offer, I will decline to submit an offer from someone else until that one is off the table. This protects both clients by keeping them out of a bidding war I would have facilitated. I'll find the second client something else. Doesn't matter how hot the market - There are very few properties so good they're worth getting into a bidding war over, and even fewer prospective buyers who will be happy in the aftermath of a bidding war.

Caveat Emptor

Original article here

Good Evening!

My name is DELETED and my wife and I recently signed papers to purchase a property from DELETED in DELETED, CA. After our options, their lot premium, and the elevation charge, the house is listed at 425,000. We have 90,000 in incentive money to spend which we would like to lower the overall cost of the home to 335,000. We only receive the incentive money if we get the loan through (their in-house lender). We were interested in a 30yr fixed rate mortgage that is 100% financing and will pay the closing costs out of pocket. I feel like I am being stiffed by their loan guy. Back in late May or early June, he told me that we could get 30 yr 100% financing with HOA, Mello Roos, PMI, PITI out the door for $2889 on some 6.75 percent loan (which still seemed high to me) but just last week he told us that we are now looking at 7.8% with out the door payment of $3250 because 100% loans are harder to finance now. I guess my question is how do I not get stiffed by their loan agent and what proper steps do I take to ensure the best loan and rate for us? I think that 7.8% is ridiculously high for this market! Here is some background info on us:

Credit scores of 750-780 for both of us
21,000 in bank accounts
2 car loans with 3 yrs remaining on each (238 and 210 per month)
Current renters with 80k gross yearly combined salary
1st time homebuyers

Any help regarding this matter would be greatly appreciated! Thank you for your time and consideration. If there is any other information you need us to provide I would be more than happy to provide it.

First off, check with your local authority to see if you qualify for a Mortgage Credit Certificate. It looks likely. Whether or not the developer's lender participates is a question, but it's a question that needs answering.

Now this is definitely a situation where you needed a buyer's agent to deal with a developer. Unfortunately, at this point it's too late to get one involved, as you've already signed the contract. The work a buyer's agent does is pretty much moot. You've already signed that developer's contract. I'll bet a nickel they'll be able to keep your deposit if you back out, and likely sue for more. They are now in a win-win situation.

Here locally, I could tell you if it was a good idea to pay that developer's extra charges or just take their basic unit. Elevation premium? What's the view now, and is it likely to stay that way? Lot premium? How many extra square feet are you getting - or is it just a junk fee? You're not local to me, so I do not know.

What I can assess is numbers. This article is a reprint and rates are lower now, but when I originally wrote this I just picked a rate sheet at random which had an 80% first with zero points and no pre-payment penalty at 6.75%. On $268,000, that's $1738. The 30 due in 15 second would be at 7.75%, with a negligible cost, for a payment of $480. Assuming that your official purchase price is $425,000, add about another $443 for California property taxes and just a guess of $100 for homeowner's insurance, and that's a payment of $2761 plus Mello-Roos and HOA, which I have no way of knowing. Never choose loans by payment, but this would cut your cost of interest more than it cuts your payment.

However, at $425,000, you've got a first of $340,000 and a second of $85,000, giving us payments of $2205 and $609, respectively, and that's what we'd be looking at if you came to me for the loan the day I originally wrote this. Add that $543 taxes and insurance, and your payments would be $3357. Not having that $90,000 in your balance makes a huge difference, and not just to the payment, but also to the cost of interest.

Here's another point on which developers hose unsuspecting buyers. Is that property, as it sits, going to be worth $425,000? Is it going to worth $335,000? If I were in your shoes, I'd hire an appraiser right now. You do want an independent opinion. The chances of that developer's appraiser rocking their boat are nil.

Here's one thing to seriously consider: Take their financing offer, even if it includes a pre-payment penalty, which I'm betting it will. Of course, if they offer you the option of buying it off with a higher rate, that's something you're going to want to do in this scenario. Then, providing the property is really going to be worth enough, refinance immediately. That pre-payment penalty isn't going to be $90,000, even with the costs of the new loan included. But you want an independent appraiser's opinion before you jump into this, to find out if it's likely you'll be able to refinance.

What you'd be doing is taking the $90,000 incentive money and then paying a toll of about $13,000 for the pre-payment penalty plus whatever the costs of the new loan are (the ones I outlined would be roughly $3000 if you accepted a 3 year penalty of $500 on the second, or $500 higher if you didn't). Net to you: roughly $73,000 - if the value of the property will cover the refinance, and you'll get better terms if the value is actually $425,000, because the Loan to Value Ratio won't be 100%. It'll be about 83%, which translates to an 80/5. Provided, of course, that the purchase contract says $425,000. If your official purchase price is $335,000, your monthly property taxes will be about $349, but then we're dealing with whether or not the lender will believe your appraisal. A paper lenders quite likely won't. Most of the time, your official sales price will be the full amount, but every once in a while developers like to throw a curve in. On one hand, a lower sales price reduces your property taxes, while on the other it means that you'll have difficulty refinancing for a while.

If you had a good buyer's agent, you'd likely already know the answers to all of these questions, and you likely wouldn't have fallen into a couple of traps, but that's water under the bridge. We have to deal with the situation as it exists, and figure out the best way to deal with the facts looking forward. If an appraiser tells you the value is there, I'd take their loan on a short term basis for the incentive money. If the appraiser tells you the value is not there, it's probably time to see a good lawyer about getting out of that contract. If you lose your deposit, that's usually not as bad as spending more than the property is worth and getting stuck with a rotten loan you can't refinance out of.

Caveat Emptor

Original article here

I've been answering this question for a long time. Whose interests do we need to be concerned about, in a "If they are harmed, we've got a problem" sort of way? Who has a primary stake in a real estate transaction, and who does not? Whose interests must be served by said transaction? Whose interests are critical, and whose are not? I never really went into an explicit answer. But some nasty emails and deleted comments of late have made an explicit answer important.

For as long as I've been thinking about the question, I've been answering it the same way. Depending upon the transaction, there are two or three parties with a primary stake: The buyer, the seller, and the lender if there is one.

The buyers interests are the most important and the most critical. They are giving up a very large sum of money in order to purchase real estate. Money is liquid; real estate is not. You can do anything with money; real estate, not so much. Therefore, there must be a compelling arguments made why it is in that buyer's interest to part with that much cash in order to buy that property. I've made a fair number of said compelling arguments, but you always have to be able to make it. Every time. If they're getting a loan, you also have to build an argument why it is worth them taking out a loan, which forces them to pay out a given amount of money every month for the next thirty years in most cases. Money that the buyer hasn't earned yet, and in most cases couldn't pay back right now if they had to. You've got to build a compelling argument for why that buyer giving that seller however many thousands of dollars in order to buy that property is in that buyer's best interest. If you're a real estate agent and you can't do this from the ground up, you're in the wrong business.

The seller's interests are also critical. There's got to be a compelling argument made as to why it's a good idea for that seller to agree to sell their property for that price. If not, they shouldn't be selling it. Real estate may be illiquid, but nobody is creating any more of it. Not the Dutch, not the UAE, not anybody, not really. So why, to paraphrase the immortal words of Roald Dahl, would someone willingly exchange something of which nobody is making more of for something which they're printing more of every day? Again, if you're an agent and you can't do this, you're in the wrong line of work.

The seller's interests and the buyer's interests are different, of course. Without those differences, nobody would ever trade anything to anyone else ever again, and that includes trading for money, or sales as it is usually called. But you've got to be able to make compelling arguments for both sides, and you've got to be right, as real estate transactions are not readily reversible in the general case. There may be occasional exceptions, but you can't go back afterwards and say, "Let's call the whole thing off!".

The lender, if there is one, also has a compelling primary interest in a real estate transaction. They are putting up many thousands of dollars of money they have already earned or gotten in some fashion in order so that the seller gets cash from the buyer rather than having to wait thirty years for the last bit to trickle in. In most cases, the lack of a lender will prevent the transaction from happening at all because that seller needs cash in order to pay off their own lender, or cash for the property in order to accomplish their reasons for selling it, not monthly payments trickling it over the next thirty years. Therefore, without the lender, the seller's interests could not be met, and therefore the buyer's interests would not be met. But the lender doesn't have a direct interest in the property investment, only that it can be sold to pay off the debt if the borrower defaults. What they do have an interest in is whether the buyer can pay them back, and, failing that, if they can get their money out of selling the property if the buyer does not.

The seller is usually paying almost everyone who works on the transaction, the buyer's money is the reason why the seller is able to pay everyone, and the lender's money is what is used so the seller can pay everyone right now (including themselves). These three parties have legitimate, primary interests in the transaction. If their needs and criteria are not being met, they can call the entire transaction off. As strange as it may be to see a real estate agent and loan officer writing this, these three parties should call the transaction off if their interests are not being met.

Everyone else is working for a paycheck: Agents, loan officers, escrow, title, appraiser, inspector, notary, ad nauseam. We make our money by being able to help one of the above three "people" consummate the transaction. Our interests lie in that paycheck, not in the transaction. We are worthy of our pay to the extent we help one or more of the primaries serve their interests, or serve those interests better. If we can't do that, we shouldn't be part of the transaction. We only make money by serving the interests of the primary stakeholders, and if we're not doing that, we shouldn't make money.

If you cannot agree with this, you and I have nothing further to talk about. I make my money by putting my clients into a situation that's better than it would have been without me. If that's not the way you make money in real estate or any other business you might be in, then you are trying to be a tollbooth, and the dynamics of the market are going to do their best to route around you. In other words, if you cannot show a value to those you serve that is at least as great as the money you make from providing those services, the market evolution is going to put you out of business as soon as it can. This knowledge goes back at least to Frédéric Bastiat, but it's nothing that despots the world over haven't known for millennia, who have been getting increasingly sophisticated about not getting put out of business as the markets have gotten more sophisticated about what adds value and what does not. I have absolutely no sympathy for any argument that concludes you must pay someone because the law says you must. To the extent it relies upon "because I said so!", the law is an ass.

That doesn't mean there aren't legitimate economic reasons to choose to use a real estate agent, a lender, a notary or whomever. There are quite powerful ones, in fact. But to the extent the law forces you to use one, the law is a tyrant, engaging in rent-seeking behavior. Healthy economic organisms interpret rent seeking behavior as damage, and seek to route around it. Eventually, they will succeed. It may take a while, but they will succeed.

So now you know why I am always looking at "What is the consumer's interest?" and "How can the consumer benefit?" and "Does this benefit the consumer?" It isn't altruism. It's enlightened self-interest. By providing value for the consumer, even if in the context of specialized knowledge or judgment that consumer may not have, I am showing an economic reason why it is in that consumer's best interest to put money in my pocket. If $1 in my pocket means more than $1 in theirs (and it does), consumers will freely choose to line up at my door for the privilege of paying me. Some consumers may not agree, and that's fine. There's plenty who agree do to keep someone who is so oriented hopping for as long as I am willing and able to work. That's the best income insurance there is or ever will be.

But if you are not so oriented - and I am looking here at any alleged professionals who think in terms of their own benefit, rather than the benefit of consumers - then it's only a matter of time before the market figures out a way to route itself around you. I and others like me are going to be working forever. Those who take the tack that "you pay me because you have to!" are going to find yourselves in declining industries, and no amount of regulation (e.g. this) is going to do anything other than delay the tide until someone figures out how. And acting self-righteously as if you have some kind of "right" to that money as you lobby the government for them to force people to do it your way will only make you more and more contemptible, more and more an object of ridicule.

Caveat Emptor (and especially Caveat Vendor)

Original article here

A search I just noticed asked the question "Who gets the deposit if escrow falls through?"

The theory of the deposit is that here is an amount of cash that the buyer is putting up as evidence of their ability and intention to consummate the transaction.

This is a good question. I've only dealt with real estate sales in California, so I'm going to deal with it from a California perspective. California is a widespread model for real estate practices (as New York is for insurance), but I can't speak to the specifics which states are and aren't following this model and to what degree.

Most of what happens in real estate sales contracts has a default way of handling it, but is subject to specific negotiation. In other words, there's a standard way of doing it, but you can change that by negotiation with the other party. California Association of Realtors (CAR) has a specific set of forms that are encouraged, in order to make these questions somewhat more clear cut.

The standard here in California is that the purchase is contingent for seventeen calendar days, after which the buyer's deposit will belong to the seller whether escrow closes or not. From the time the contract is accepted by both sides, the buyer has seventeen days to finish all inspections, and to obtain a commitment for acceptable financing. If they call it off within those seventeen days, they get the deposit back. If the purchase falls through later than the seventeen days, the seller is usually entitled to the deposit, within limits. The seller can't just arbitrarily cancel the transaction on the eighteenth day and keep the deposit. The time specified in the purchase contract has to have expired, there must be evidence of bad faith dealing on the buyer's behalf - something.

Let me make very clear that the seller is indeed giving the buyer something when the purchase contract is signed. To be precise, the exclusive right to purchase that property for a certain amount of time. There are expenses of selling that they must pay and that they don't get back if the buyer can't carry through, not to mention expenses related to preparing to move, at least potentially having the house sit vacant, etcetera. They cannot conclude a purchase contract with anyone else while the current buyer's contract is going on. If I'm selling, I insist upon retaining the deposit if the buyer can't carry though. If I were to be unable to consummate a purchase, I certainly understand that the seller will retain the deposit in most circumstances.

The escrow company won't just give the deposit to the seller. They are paid to be a neutral third party, to stand in the middle and make sure that everybody gets what everybody agreed upon, but it is not their place to settle a dispute. For that, you're going to have to go through whatever dispute resolution process is appropriate. This can be mediation, arbitration, the courts, or possibly something else. You can spend a lot of money fighting what the contract says, but in the end you can also expect to have to live up to it, and likely to pay the other party's costs as well as your own, so better not to fight something the contract says you should have done. The escrow company will often also charge a cancellation fee from out of the deposit, by the way. They do an awful lot of work, and if the transaction gets canceled for whatever reason, they do not otherwise get paid.

The number one reason for failed escrow is loan providers leading borrowers down the primrose path. "I can do that," and no, they can't. Unfortunately, I've never seen anyone able to recover damages from a failed loan provider. I used to advise people to get back up loans, but due to changes in the loan market, nobody can offer those any longer. For sellers, look for a qualification letter that you can take to any loan provider to find out if this buyer is qualified.

You can change the standard contract by specific negotiation. If you're a seller who wants to get the deposit no matter what on day 30, you can ask for that as a condition of the initial sales contract. In a hot market, this is easy to ask for and get, but in a buyer's market, you are likely to lose the buyer. If you're a buyer who doesn't want to lose the deposit no matter what, you can ask to put that into the contract you propose, but most sellers, even in a buyer's market, are going to tell you to take a hike somewhere else. No big deal if it was "Hey, let's make a bid on this and see how desperate they are!" A real problem if you fell in love with the property and just have to have it. Over-playing your hand in negotiations is as disastrous as under-playing, and I've seen many people so intent on being Mr. Tough Negotiator that they diddled themselves out of an excellent transaction. In any case, being too sticky on the deposit is a good way not to get as good of a price as you otherwise might have. For a seller, you have this property and you want cash. You need somebody to agree to pay it - the cash is not going to materialize out of thin air. For a buyer, the whole idea is that this property is attractive to you for some reason, or you would not be making an offer. You are asking the seller to trust thousands of dollars to your ability to swing the deal as much as you are trusting their ability to deliver a clear title to a property without hidden defects.

Whether you are a buyer or a seller, once that contract is signed, you want to get cracking on whatever your obligations under it are. Get it Done. Prompt good faith execution of everything you need to do to make the contract happen is your best protection against losing the deposit if the transaction fails. The alternative is that you're likely to forfeit whatever rights to the deposit you may have had if you had been prompt. Just because Things Take Time in Real Estate Transactions is no excuse for you to waste time. Wasting time is expensive for everyone, and one of the strongest signs of a sour transaction I know. Buyers and borrowers pay increased loan and other costs, sellers lose money from delay. This is equally true in refinancing, by the way. The loan you are quoted today does not exist tomorrow unless you act on it today. In summer 2003, when rates hit what were at the time fifty year lows, many people were in no hurry, and rates shot up a full percent and a half over a couple weeks. Today, rates have been even lower for years, but they've been slowly climbing these last several months, and you can see signs that they're going to rise further even if the economy dies completely. But many people insisted upon thinking, in the face of evidence and testimony to the contrary, that the rates would always be there, and they lost out. This happens constantly on smaller scales, and recently happened again on a bigger one. If rates go down after locking, a good broker may be able to get you better rates. If they go up, you've got the lock. If rates go up and you didn't lock, you get the higher rates. Period.

But the deposit is definitely something that the buyer can owe the seller if the transaction falls through, and that's as it should be.

Caveat Emptor

Original here