Buyers failed good faith test, sellers consider next steps

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Q: I had a contract with a buyer to sell my house. A week before closing, the buyer canceled the transaction. The buyer said he could not get the interest rate for his loan as stated in the contract, even though it had been approved by the lender and the rate was well below current market rates , according to our agent.

About two weeks after the proposed closing date, we discovered that they had signed a contract for our house and for another house at the same time. Also, our agent discovered that the buyers really didn’t want our house. It seems they only wanted our house as a backup contract if their other failed.

Do we have recourse, and secondly how do we protect ourselves so that it does not happen again in the future?

A: Your question raises some interesting issues. First, sellers like to assume that a buyer is buying in good faith. This means they are making an offer because they actually want to buy the house. In your case, the buyers seem to have failed the bona fide test.

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We get how it could have happened. In a white-hot housing market the United States has found itself in for some years, particularly during the pandemic, sellers have routinely responded to multiple offer situations – sometimes with as many as 30 to 40 offers to sell. ‘desperate buyers marked by the loss of many other multiple auction situations. Yet putting two offers on two different houses simultaneously is a recipe for disaster unless they are ready, willing and able to buy both houses.

So what can or should you do? To get started, make sure each buyer signs a home purchase and sale agreement. Second, make sure the buyer deposits sufficient funds as a bona fide deposit so that it will hurt them to back out of the deal.

In some parts of the country, the down payment or earnest money deposit can be a nominal amount of, say, $500 or $1,000. We would prefer to see a significantly higher number. How high ? A number that would cause pain to the buyer if he backed out of the deal. For a home priced at $300,000, the buyer would be expected to put down at least $10,000 (and preferably more) as a down payment.

Then, if the buyer backs out of the deal, they could lose that $10,000. Any large sum of money will make the buyer think twice about placing multiple offers on multiple properties, just to see which one comes up. And if both homes required at least a good faith deposit of $10,000, the buyer might think twice about committing in writing to buy two homes.

Many purchase agreements contain a financing clause that allows the buyer to terminate the agreement and get their money back if they are unable to obtain financing for the home purchase. However, the buyer must show that he applied for financing and that he was refused this financing.

Given your question, it sounds like your buyer was able to secure financing, but found an excuse to back out of the deal. You will need to hire a real estate attorney to help you challenge the buyer’s ability to recover their deposit. The lawyer can review the circumstances of the request for the return of the deposit and can order the holder of the deposit to keep this money until the problem is resolved.

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This is one of the best ways to make sure the buyer is sticking to the terms of a contract. You asked what you can do in the future, and the answer is to look at the purchase and sale contract you signed. You might have everything you need there. You will need a lawyer to assist you and represent you in the application of the terms of the contract and to cut short the “clever” maneuver of the buyer.

If you suspect foul play in a real estate transaction, you must ensure that you are well represented and that the person representing you puts your interests first. In many parts of the country, real estate attorneys do not represent buyers or sellers in a residential transaction. The lawyer may act as a settlement agent but has no duty of loyalty to either the buyer or the seller. In these states, you need to be more vigilant to guard against this sort of thing, and you may need to hire your own attorney if the case goes south.

You will need to move quickly. If the buyer canceled the transaction and claimed they couldn’t get financing, the settlement agent may have released the deposit. In this case, it will be more difficult to recover the deposit.

By the time you realized what had happened, it might have been too late to object to the return of the money. Considering all of this, you probably didn’t do anything wrong. You simply didn’t have enough knowledge to know that you should have objected to the return of the deposit to the buyer and insisted that the buyers prove that their failure to obtain financing was in accordance with the terms of the contract.

At this point, you can only move on and find another buyer who likes your home, and then close the purchase.

Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also CEO of Best Money Moves, an app that employers provide employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through his website, BestMoneyMoves.com.

©2022 Ilyce R. Glink and Samuel J. Tamkin. Distributed by content agency Tribune.

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