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NO DEPOSIT CONTRACT - IS IT A CONTRACT?

By Richard Zaretsky

Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

November 01, 2010 02:14 AM

Do brokers encourage buyers to make "no deposit contracts"? Why are they so pervasive? Are they legally binding?

A contract to be a mutually binding obligation on the buyer and the seller must have "consideration".

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

A consideration is something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; which motivates a person to do something.

So to put a real estate in its simplest form, Buyer and Seller enter into a contract and each are to undertake some tasks. Seller is to perform by delivering title (or in a short sale contract, first by delivering lender approval) and Buyer is to perform upon receipt of the title (or approved short sale acceptance by lender) by paying for the property according to the contract terms (first deposit and then purchase).

I can tell you up front, I don't like no deposit contracts. I don't like them because the typical buyer has inadequate funds to buy every property for which a contract is signed by him/her and often that buyer is looking to match up another buyer for a simultaneous or 30 day hence closing. The point is, the buyer has as much chance of walking away from the contract as closing on it, since there is literally no risk and no cost to the buyer. I have written about this before - see MULTIPLE SHORT SALE CONTRACTS AND HOW TO AVOID THEM.

Just to cover you next "ah ha" moment, yes - once the lender approval is obtained, if the buyer does not post the stated deposit then the buyer is in breach and can be sued for that deposit. Yippidee Yeah! No big deal there as few sellers are going to invest dollars to sue that buyer for the deposit.

Another reason I don't like "no deposit contracts" is that we find in Florida that one-half of those buyers decide not to buy the home and they never tell the seller or their broker of their decision. When it comes time for them to put down their deposit, or counter the seller's bank's demand, they cannot even be found. Thus these contracts too often are a waste of time for the brokers and the Title Company and lawyers.

Getting back to the no deposit contract - The obligation of the seller is to obtain something for the buyer (usually bank approval for the short sale). The obligation of the buyer is upon delivery of the bank approval, make the deposit and do certain inspections of the property, and then purchase the property by paying the balance of the funds. This is called "executory consideration". It is consideration based on the happening of an event. It is valid consideration.

Just because it is legal consideration and a valid contract does not mean a "no deposit contract" is something that broker should encourage. If you represent the buyer, you should be fully cognizant of the game plan your buyer has so you are not wasting your time. If you represent the seller, your confidence level that this buyer will perform on this contract should be extremely high if you are going to advise your client to accept the offer.

Most contracts contain so many other contingencies that the buyer can walk away on a whim - if done so timely. "No deposit contracts" have their place - just use them wisely.

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Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 email: RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

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Randy Ostrander

Lake and Lodge Realty LLC - Big Rapids, MI

Real Estate Broker, Serving Big Rapids and West Central MI

Not a big fan either Richard. Buyer should have something invested when placing offer. I have seen where one person put bids in on four or five properties knowing full well they were only going to do one but had nothing to lose wasting the time of the other sellers and their agents. Not a good way to conduct business.

Nov 01, 2010 02:21 AM

Carol Zingone

Berkshire Hathaway Home Services Florida Network Realty - Jacksonville Beach, FL

Global Realtor in Jax Beach, FL - ABR, CRS, CIPS

Richard, I don't like no-deposit contracts, and I have taken the route of getting my buyers on short sales (in particular) bound to the listing by accepting their binder within 2 days of acceptance by the owner/seller. If the deal falls apart, my broker has the escrow and we can get it back, but this stops them from looking at other properties while waiting for bank approval. May not work all the time, but I've had great success with it to date.

Nov 01, 2010 02:26 AM

Dan Edward Phillips

Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA

Humboldt and Del Norte Counties, CA

Good Morning Richard, excellent post on a very important topic!

Nov 01, 2010 02:31 AM

William J. Archambault, Jr.

The Real Estate Investment Institute - Houston, TX

Richard,

In such situations I always Liked "personal Notes"in an amount significant enough to be collectible or in smaller deals at the small claims court limit, for the do it yourself types.

I have major reservations about shout sale deposits a buyer's default is the only way the seller is going to leave with money. Although I have suggested and used very large deposits as a baring tool.

Bill

Nov 01, 2010 02:46 AM

Gary L. Waters Broker Associate, Bucci Realty

Bucci Realty, Inc. - Melbourne, FL

Eighteen Years Experience in Brevard County

These no deposit offers seem to be prevalent these days although having a little skin in the game is the only way to assure some commitment!

Nov 01, 2010 03:31 AM

Richard Riley

RE/MAX Properties SW - Orlando, FL

CDPE, I.R.E.S.

Another good and timely post Richard. I'm reluctant to have a buyer deposit funds in escrow with the seller's escrow agent. If the offer does not result in a contract the buyer is hampered until the seller's escrow agent returns the funds and some, as you know, are not very rapid responders.

My preference is to have the buyer place funds in escrow with an affiliated title company. The title company can issue an affadavit that they hold funds in escrow which I can include with an offer. If no contract results the funds are unmoved and available for another offer. Of course, I do not submit multiple offers based upon one deposit.

Nov 01, 2010 09:48 AM

Damon Gettier

Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert - Roanoke, VA

Broker/Owner ABRM, GRI, CDPE

I always requre a deposit for sales contracts. The larger deposit we see, the less problems we usually have.

Nov 01, 2010 02:11 PM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Well of course it's still a valid contract. My sellers however will not accept a contrcat without a deposit on a short sale.

Now when I work with buyers we almost always offer a contract with no deposit on short sales. And they usually get accepted. Go figure.

Nov 02, 2010 06:32 AM

J. Philip Faranda

Howard Hanna Rand Realty - Yorktown Heights, NY

Associate Broker / Office Manager

In New York my observation is that if there is no deposit, there is no consideration, and therefore, no true contract.

Nov 09, 2010 12:25 AM

Jon Zolsky, Daytona Beach, FL

Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL

Buy Daytona condos for heavenly good prices

Richard, withh short sales, where so many things START with Lender approval, it does not look like deposit has a serious value. They can walk away because the would use Inspecton period for this.

Nov 13, 2010 06:26 PM

Richard Zaretsky

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Good point, Jon - But....

We find buyers are often a fickle bunch and they disappear just when you need to tell them that the bank approved their contract. Why do they disappear? Because they made multiple contracts and lost interest in our deal - without telling anyone. Why did they not tell anyone? Because they had nothing to do - they did not have to ask for their deposit back.

We take deposits so we have communication - even if the communication is that the buyer is terminating the contract.

Nov 14, 2010 03:33 AM

Debbie Summers

Charles Rutenberg Realty - New Smyrna Beach, FL

Richard... When my husband asked me to marry him, he had a ring... The ring sealed the deal! The deposit does the same thing...

Dec 06, 2010 02:35 PM

Anonymous

Thomas Keegan

As a buyer, I came across this post while researching short sales. I read my contract and literally laughed my ass off. Let me say this. No short sale committment is valid when you use a standard ssa-3 florida real estate form. From a buyers perspective.. you are asking me to put an offer in to a seller, and sit around for the lender to decide IF they want to sign this contract. In the mean time you expect the buyer to just sit around and hope you hear back from the lender. In the mean time..... the seller can be directed by the lender to accept AS MANY OFFERS AS THEY CAN GET and submit them to the lender. So.. you have now wrapped up numerous buyers into many contracts for the same property. So, where is the consideration on the part of the seller???? There is nothing to make the lender consider your particular offer, so why should a buyer put up any money before the contract is accepted by the lender. Now I understand why there are so many problems with real estate short sales...

Buyers are walking away because lenders are sitting around deciding what contract they want to accept. Why shouldn't a buyer have the same option ??? Until the contract is actually signed by the lender.. THERE IS NO CONTRACT. Now.. I may be wrong about all of this.. but.. hey.. I am a buyer.. I should be expected to put my cash up for an unspecified amount of time, sit around for 2-6 months hoping interest rates don't rise (or pay a lot to lock in a rate), only to be competing for a contract when there could be any number of offers they are considering.. Does any os this make sense to the brokers (who I understand are caught in the middle of a bad situation)?

Oh.. and what really will piss off a buyer is that whatever I submit as a price to the seller/lender is binding, yet they have the right to void the contract because the CMA went up.. now.. explain to a buyer how any of this can be possibly legal...

Jan 04, 2012 12:47 AM

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