Blog: R.E. Tales
(Hey, they all can't be pretty...)
This is an issue that we see only rarely, but it’s important enough that everyone should know about it. First, why do we insist upon having the buyer make a deposit? Easy. It’s money that he risks losing if he does not perform as the contract stipulates that he will. That’s fair enough as the seller also risks something: he risks losing the chance to sell it to someone else for a million dollars (or whatever is acceptable). Once you are under contract, the seller cannot sell it anyone else, so the deposit serves to hold the buyer’s interest. The buyer knows that if he decides he wants a farm with a red barn and not the white one that is there, then he risks losing his money. If he wants his money back, then he has to provide for it with a Contingency in the Purchase Contract. Each contingency that is added makes your offer less strong, so I don’t like to have too many if that can be helped. But if you need a contingency, then by all means, I want it in there. Common ones are to secure a mortgage or to sell property that the buyer owns., Inspection clauses are also common contingencies, though they may not be written in as such if there is a mortgage contingency as the bank may insist upon them as a condition for the mortgage.
Yet it is rare that we see someone lose money. I can think of but a few examples in the last 35 years, not many. From New Jersey, Simon put down $15000 on Mark’s farm. He had just been through a divorce, had sold his home (actually, he’d given it to the ex-wife as part of the settlement) and now was going to do what he’d always wanted to do – be a dairyman. He was going to show her that he could go it on his own. Only the ex didn’t want him moving so far away. She wanted the divorce, he didn’t, but she still wanted him around. So she began making overtures about “getting back together”. Meanwhile, a closing was scheduled. He called the lawyer and said he had to put it off a bit. We rescheduled one. He didn’t show. His lawyer called him to find out and got a feeble excuse. We scheduled yet another closing. He didn’t come to that either. When he would not answer the phone, his lawyer fired him. After some months, and after giving him written warning, the seller took the money as Liquidated Damages.
Then there was Dennis from Pennsylvania. He’d been out with me before a few times over the years, one of those guys who almost buys a farm. But this time, he actually signed a contract and committed himself, putting down $10000 to hold it off the market. Time wore on and we got no closer to a closing, always an excuse. It also got harder and harder to contact him. Eventually, the seller pulled the plug, sent him a “Time is of the Essence” letter, meaning that if you do not perform by a certain date, we’ll take your money and will not sell to you. That usually produces results. But this time it didn’t, so we put it back on the market, sold it, and ate the several month delay. A note was sent to him saying his deposit would be forfeited. Dennis didn’t like that and he demanded that we return it.
We serve as an Escrow Agent, meaning we are not a principal to the sale (neither buyer nor seller) but hold the money in what is basically a neutral position. We cannot release it to either party unless one of three things happens: 1) There is a closing. 2) A contingency was not met in the manner proscribed (eg – the buyer could not get his mortgage and notified us as such within the proscribed time period). Or 3) We otherwise agree.
In this case, neither Dennis or the seller agreed, so Dennis got a lawyer involved. He didn’t get anywhere, then stopped responding to us. A few months later, another lawyer was evidently engaged by Dennis and came demanding a return of his deposit. That didn’t go very far either and after a while he wouldn’t respond to us, just like the first lawyer. Finally he did, and said that he’d fired Dennis when he realized he was not going to get paid. So the thing drug on for more months. We tried to get a court to take the money off our hands, but they didn’t want to get involved. A couple of years passed without hearing anything from Dennis, so we finally wrote the seller a $10000 check. Nothing more was ever heard about it.
You may wonder why it took so long this time and not in the first example. The difference is that Dennis wanted his money returned and Simon never asked for it back. We felt we needed to give Dennis every possible chance to make his case.
Right now, I am working with two cases. In one, the buyer put down only $1000. That’s all he had, apparently. Yet, he signed that he had 20% to put down in order to secure the necessary mortgage. When the bank discovered he had no more money, they wouldn’t give him the mortgage of course. Meanwhile, the seller thought all was well. After all the 45 day period for him to get the money was long past, and no one had told us there was any problem. He’d engaged a lawyer to conduct the closing. The seller had borrowed money at 13% interest for a bridge loan so he could get started building his new home so he’d have something to move into. He’d engaged a trucker and had loaded the truck with all his worldly possessions when I came up to tell him the bad news I’d just learned. This was not a good day for him.
Now, we have another problem. I think the seller has every right to keep the $1000. As he is very poor, it is an amount that means a great deal to him. It also means a great deal to the buyer as he’s not any richer. Yet, it’s too small to justify paying an attorney to adjudicate. I am going to try to find a center ground that each party can agree to. This is not my job and I shouldn’t have to do it, but there is no one else that can. When I am done, neither will be happy, but the issue will have been resolved. This is one reason I do not like small deposits; it’s not enough money to argue over, but I have to account for every cent.
The other deal is thornier. Steve and Sylvia came up, saw Tim’s farm and fell in love with it, offering full price (which was low and not optimistically inflated). Their plans were clear; they were moving to make room to expand their farming business so they could take adult children into the business. They would live in the house for a couple of years, then build a smaller one for them, and then let their married daughter move into this one. The home here, I should add is very old but has been beautifully restored and kept. It’s in A1 condition. Steve and Sylvia kept saying how much her daughter loved old homes and that her husband liked them even better. They put down $10000 and we got the contract fully executed. A few weeks later, they asked if I could show the home to the daughter and her family. I did, and thought they loved it. Only, after she returned home, she told Steve that she refused to live in an “old” home. So Steve said he wanted his money back as the whole idea of the move was to bring in the second generation. Tim, a nice guy, feels he did nothing wrong and sees no reason why the $10000 should be refunded. My advice was to not do anything until he has spoken with his attorney.
These things are almost never black and white and when there is a difference, usually neither party gets what they wanted. I have suggested the obvious compromises to Steve and Sylvia, which didn’t get very far. If they really will not buy the place because the daughter wants a new home and Sylvia wants a smaller one, they needed to either make that a contingency or have waited on the contract and not tied up the property until the daughter could get there to pass her opinion. But they didn’t do that. Now, Tim is out a crucial 7 weeks of advertising and showing time, with the Christmas slowdown approaching and his plans for his future have gone somewhat awry.
I like both parties and consider them friends and just wish I wasn’t involved in all this as I fear jeopardizing a good relationship. Though I could, it is my general policy to not make any claim for myself in a case of liquidated damages; it’s better to wash my hands and not have a dog in that fight.
Some are merely amusing. some can help you immensely. All are interesting.
After 40 years, I've learned a lot, & acquired unforgettable experiences. Follow these long enough and you'll eventually get the whole book. (Names probably changed, for obvious reasons.)