How to risk losing your deposit

Sam, you're much more familiar with the nuts and bolts of the home buying process (and the assorted things that can go wrong). In your experience, how common is it for people to miss contractually-obligated deadlines? And how common is it for sellers to return the buyer's earnest money if she misses a contractually-obligated deadline and the deal falls apart? I would think that both of these would be fairly uncommon (that is, I'd think most people meet their deadlines, and if a buyer does miss a deadline and the deal falls apart, most sellers would keep the earnest money), but I don't have much experience here.

Also, what's the typical earnest money deposit in the current market?

Kim had a legal agreement and she had an obligation that she did not fulfill. Could she be held accountable? Sure. However, we are talking a few days here. I am surprised by the inflexibility of the seller. Maybe a few years ago, you could argue that in those few days he lost out on many potential sales. But in the current economic environment I doubt it; he should look at the big picture and consider himself lucky to have found a buyer. Sounds like he has a heart of stone; does he work in the foreclosure industry?

SAM says: James (#1) - To my amazement, I see buyers and sellers that fail to meet deadlines all the time. (I see it happen more often now than when I began as an agent.) Worse yet, many of their their agents and attorneys are not paying attention either. Typically, things work out after a lot of stressful posturing and negotiating because, in the end, most sellers still want or need to sell. Even though they want to sell, they usually need to do it on schedule, so they want to get paid for the inconvenience of not closing on time or any additional risk that they take on when the buyer does not perform as promised.

In many cases, a seller is buying a replacement property almost immediately, often the same day. That means that if their sale does not close, the deposit that they've made on their new home will be at risk. If the seller is buying another property and and his agent and attorney have done their job well, the seller's purchase agreement will have performance or contingency dates that trail the dates in his sale agreement by a few days. When the buyer does not perform as agreed, that can put the seller's new home deposit at risk and can also allow the seller of the new home to cancel the contracts. Real estate transactions are often structured based on the successful outcome of other transactions. It's like tumbling dominoes. When one domino tumbles it usually takes the others with it. For that reason, it's important for buyers to build a buying team (agent, attorney and lender) that takes the dates in the P+S seriously. (One lender told us that they don't issue a commitment until a week before the closing. They totally ignore the mortgage contingency date and leave the borrower's deposit at risk. They are a huge lender and the borrowers don't have a clue at the risks that they take with this lender.)

The most common deposit in much of the Greater Boston area is around 5 percent, although I've seen it vary from $500 to 10 percent of the purchase price, depending on the property and the circumstances.

Kim (#2) - There are still many good buyers out there for good properties. In this case, the seller was not in the Foreclosure industry. It's often not about the money. Sellers get upset and want to be compensated for the inconvenience and expense that they incur when they don't close on time. They still have mortgages, taxes and insurance to pay if the closing is delayed. They often have movers to reschedule and all of their belongings packed. They need to buy take-out or go out to eat. It all adds up. Some sellers deal with change and risk better than others.

The best rule is to do what needs to be done on time and avoid all of the hassle and stress.

If this happened to me as a buyer I would rake the seller over the coals as much as possible. Any minor nit in the inspection would be considered major, any simple request from the seller would be declined, and all messages would be delayed or "lost." What goes around comes around.

Typically, the mortgage application deadline is on or right after the P&S is signed. This often contributes to the problem because the naive buyer doesn't often realize that he/she should have already submitted a completed application, despite the buyer's attorney, realtor, and lender's best intentions.

The smart course is to get fully pre-approved (not pre-qualified) before even making the offer.

Another good idea is for the buyer's attorney to build into the mortgage contingency an extra few days for the mortgage commitment. This shouldn't be a big deal because it's early in the transaction.

Many of my purchases have been requiring extensions of loan commitment deadlines because lenders are so much stricter on underwriting, etc. these days. It's definitely a major issue nowadays.

Richard D. Vetstein, Esq.
Legal Contributor for Boston.com

If this happened to me as a buyer I would rake the seller over the coals as much as possible

And if I were the seller, I would gleefully relieve you of your life savings in court, should I sell later for a lower price.

If you are not prepared to abide by the terms of a contract you sign, you are not prepared to own a house.

I agree with Sam. People increasingly regard deadlines and other contractual obligations as trivial annoyances. Remind them of their duties, and they'll tell you, "Don't be that way!" I recently disposed of an estate to a buyer who missed every specified deadline, starting with the expiration of the counter offer. To top it off, she flew into fury when, at the last minute, she wanted to move the closing date that she had chosen by weeks, because she didn't notice that it was after her rate lock had expired. Needless to say, rebooking a moving company and several vacations at a moment's notice for Miss Antoinette's pleasure was not about to happen. A curt reminder that she was about to lose her deposit, lose an action for specific performance, and be held liable for a large sum seemed to refocus her attention effectively.

Marcus,

Was the deadline in the counteroffer something your buyer had contractually agreed to in any way? Assuming it wasn't, missing that deadline certainly weakened her negotiating position (essentially, she held an option and let it expire), and didn't bode well for the rest of the deal, but it's not in the same ballpark as missing a mortgage application deadline.

James, missing the counteroffer deadline was just the first warning signal. It's in the same ballpark, in the sense that it indicates someone who doesn't understand how to use a calendar. She proceeded to miss multiple deadlines along the way (this was in a different jurisdiction, with a different purchase process) before deciding that the closing date was subject to her ever-changing whim and pleasure. She was whipped into line after I convinced her attorney that I was happy to spend far more on legal bills litigating against her than I could hope to collect, although I was certain to pocket her down payment savings. In certain situations, some things are more valuable than money.

While I calmed down this buyer with a bracing and salutary slap, many folks just let things slide. Bad behavior is overlooked, obligations are becoming suggestions, and ethics are evaporating. This is, generally, not the kind of business climate that a Western economy needs to keep the wheels turning.

SAM says: Jerry #4 said:- "If this happened to me as a buyer I would rake the seller over the coals as much as possible. Any minor nit in the inspection would be considered major, any simple request from the seller would be declined, and all messages would be delayed or "lost." What goes around comes around."

By the time a P & S agreement is signed, the inspection is typically over and negotiated. The reality is that the moment that the seller has the ability to keep a deposit or cancel the deal, the buyer has little negotiating power left. Your choice of words is interesting. "If this happened to me as a buyer..." It didn't "happen" to the buyer. The buyer CAUSED it to happen. If that's what you would try as a buyer, just curious what you would do if you were the seller and this happened to you.

Your comment also illustrates one of the biggest problems that I commonly see, which is the failure of either side to realize that a buyer-seller relationship is unique because even though the parties are on opposing sides, they each need the other to be able to close on the deal for their individual benefit. If, for some reason this seller had a title problem or needed more time to close at the last minute, I suspect that would have cost him big time. IMHO, after the P+S is signed, it is better to be civil to each other than to butt heads because you never know what you will need from the other side before you close the deal. It's always best to keep your eye on the prize and not get emotionally bent out of shape on the way to the closing.

I agree wholeheartedly with you, Sam. It's so easy for buyers and sellers to think of themselves as adversaries, particularly after tough price negotiations, but keeping things cordial benefits both parties.

Civility should be the rule. But I agree with Jerry that you need to be careful, else the other side react negatively. I had a former neighbor who was apparently difficult in dealing with the buyer of his house. It eventually moved to closing, but during the final walk thru the buyer noticed that a set of drapes & hardware was missing. Since the drapes were specifically called out in the contract as being included with the house, he refused to release the sales proceeds until the drapes were returned. The seller, at this point being very nice, asked to make up the difference in cash. The buyer refused. But the problem was that everything was either in storage or being shipped overseas, because the seller was moving to Korea. As a result, the seller had to pay the storage company to find the drapes, ship them back to Boston, and then have them professionally re-installed. All in all it cost him a lot of time and money.

Based on conversations with my new neighbor, he would have happily taken the cash (or even ignored the entire issue) if the seller had been less of a pain. But he was in no mood to be nice to the seller, so he held him to the contract. I'm not sure if this is what Jerry meant by raking them over the coals, but my guess is that my former neighbor felt a bit raked.