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The Saga with Earnest Money Deposits on Bank-Owned Homes in Sacramento

By Elizabeth Weintraub Sacramento Broker

Real Estate Agent with Elizabeth Anne Weintraub, Broker DRE #00697006

January 30, 2009 01:40 AM

As the number of foreclosures on the market in Sacramento continue to fall, banks are becomingly more demanding. It's not enough that they may want to see copies of the buyer's bank statements, a large earnest money deposit, a direct lender letter (which means some borrowers have to qualify twice) and proof of eye color before they'll look at an offer on a bank-owned home, but some reo lenders are insisting that the buyer's earnest money deposit become non-refundable upon offer acceptance.

Since turnaround time can be excruciatingly slow in many cases, that time lag can give a buyer the chance to quickly run over and conduct a home inspection, providing one can find a home inspector who will drop everything to do it.

The company I work for, Lyon Real Estate, has decided it will no longer collect earnest money deposits to place into trust on bank-owned homes. And that's a relief on several levels. First, banks routinely want to increase the deposit. For example, last week a first-time home buyer wrote an earnest money deposit for $3,000 on an under $200K home. The bank countered and insisted on a $5,000 earnest money deposit.

When the offer was accepted, the bank then directed the buyer to make a new earnest money deposit payable to XYZ escrow company in southern California. Which delights me to no end because escrows are handled differently in southern California than in northern California. I know this first hand because 30 years ago I was an escrow officer in southern California. The bank requested the new check late on Friday, which meant I had to FedEx the earnest money deposit on Saturday for a Monday delivery. But we got it there.

Yesterday, the buyer asked me why her bank charged her a fee for non-sufficient funds. She honestly did not realize that escrow would cash her check. She thought escrow would hold it until closing! Although I had initially explained that her check would be held until offer acceptance, this buyer did not understand that upon offer acceptance it would be cashed -- because I didn't spell it out.

Which just goes to show that we, as agents, can rarely go wrong by taking nothing for granted.

Fortunately, she is able to wire the funds today.

The Short Sale Savior, by Elizabeth Weintraub, coming soon to a bookstore near you.

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Katerina Gasset

The Gasset Group & Get It Done For Me Virtual Services - Provo, UT

Amplify Your Real Estate & Life Dreams!

Elizabeth- Oh my gosh, great minds think alike. I am just about to publish a post about earnest money but not in regards to short sales, a regular sale! How funny!

Jan 30, 2009 01:50 AM

Chris Ann Cleland

Long and Foster Real Estate - Gainesville, VA

Associate Broker, Bristow, VA

Elizabeth: I am amazed that our bank owned home sales aren't frought with this EMD drama. I've not heard of such a mess. And I've sold too many bank owned homes recently. EMD's to the listing broker about half the time, but no one has been asked to up the amount, or made it non-refundable. Hope this isn't a California trend that will spread to my market.

Jan 30, 2009 01:57 AM

Tom Braatz Waukesha County Real Estate 262-377-1459

Coldwell Banker - Oconomowoc, WI

Waukesha County Realtor Real Estate agent. SOLD!

Elizabeth

I think the banks, and a lot of the people that work in the banks need to start getting it together so things are a little more systematic.

Sincerely

Tom Braatz

Jan 30, 2009 02:01 AM

Colleen Fischesser Northwest Property Shop

NextHome Experience - Chelan, WA

A Tradition of Trust in the Pacific NW since 1990!

I agree 100% with Tom's comment, but hold no hope this is ever going to happen! In my market REO properties have a few more hoops to jump through, but because of their time on market, buyers have a little more flexibility negotiating some of those "hard and fast" rules.

Jan 30, 2009 02:41 AM

Valerie Spaulding

Windermere Peninsula Properties~Allyn~Belfair~WA - Belfair, WA

Allyn-Belfair-Hood Canal-Local Expertise!

I haven't had the lender ask for increased earnest money but in their addendums that they send out -it has made the earnest money non-refundable. They also want the buyer to provide a cashiers check instead of a personal check. I just read Katerina's post also. Just as Tom said,I would love to hear and see that the lenders are getting it together as far as a system but working with 3 lenders right now ---- I don't see a system other than their phone system that takes a year and a half to get through on... . Especially if you are not assigned one specific person and can't get through to the last rep you spoke with. I spoke with a lender yesterday and when I asked how long their approval process is taking she said anywhere from one week to 4 months... she couldn't answer me when I asked why such a wide range of length of time?? SOunds like the weatherman here when they tell us we will get anywhere from 4- 18 inches of snow!

Jan 30, 2009 03:19 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

In a way, I can see why the banks want to tighten requirements for offer submissions. I imagine they are tired of getting offers from buyers who aren't fully qualified nor committed to the purchase. Any mortgage broker who can fog a mirror and type on a keyboard can produce a prequal letter for a buyer -- many of them are meaningless.

But because we are dealing with such a large volume of banks, all of which have different procedures, I doubt we're going to see a streamlined program very soon.

I like Valerie's analogy. Perhaps it's more like the temperature tomorrow could be below freezing or it could be over 100 degrees. Hard to say.

Jan 30, 2009 04:09 AM

Terry & Bonnie Westbrook

Westbrook Realty Broker-Owner - Grand Rapids, MI

Westbrook Realty - Grand Rapids Forest Hills MI Re

Just when we think we know all the rules they change them. Some day this will just e a bad memory we will talk about. Soon I hope.

Jan 30, 2009 04:11 AM

Anonymous

Jaded

Time to confer with Lyon legal counsel. As hard as it is to keep a deposit with contingencies on both sides of the deal, knowing that the seller/REO lender will not make any deadlines, etc. I'm really suprized at their arrogance.

As an individual seller, I've never been successful, but have been able to get pass through dollars for items the buyer wants done before COE. I personally know a large homebuilder/developer whose policy is "give it back quickly and get out" if there is a problem as they found it costs less money than any other option.

Large sellers of properties to individuals, ie tract builders/developers are treated by the DRE as "dealers" and have to submit their documents for review and often modification. The contracts are much more consumer friendly than the already friendly CAR documents when done. Usually a surprise to out of CA based tract builders. Probabably would be a surprise to a lender to be treated that way also but I can just see it coming, having such a large invitation.

By the way, the number of properties the DRE allows a seller to sell in a single subdivion before filing a subdivision report is 2 or 3. Hmmmm.

The wild west stops on the east side of the CA border!

Jan 30, 2009 04:16 AM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Jaded: I don't believe there is any arrogance on Lyon's part. Agents can still collect deposits on foreclosures / bank-owned homes. The checks just can't be payable to Lyon Real Estate. They are paid to (blank) Title Company. The problem is once Lyon deposits a check into its trust account, it doesn't have the wherewithall to produce a check, much less a cashier's check, with 6 hours' notice. Some of these REO offers require fast turnaround.

Yeah, the Wild West does stop at the CA / Nevada & Arizona border.

Jan 30, 2009 04:32 AM

Jesse Clifton

Jesse Clifton & Associates - Fairbanks, AK

If anyone ever needed proof that banks do not belong in real estate, this era of foreclosure activity should be enough. Banks helped to create this mess by not acting in their own best interest... and for some reason are still not doing so. Making it difficult for ready, willing, and able buyers to take a depreciating asset off their balance sheet is not a smart idea.

Jan 30, 2009 06:08 AM

Anonymous

Jaded

Sorry, Eliz, I did not mean Lyon's arrogance, I was directing my comments towards the lenders/REO sellers. I think Lyon is one of the best RE companies out there...anywhere... and I have always had excellent results when dealing with them as a seller or agent.

Jan 30, 2009 07:05 AM

#11

Myrl Jeffcoat

Sacramento, CA

Greater Sacramento Realtor - Retired

Elizabeth - Your statement, "Which just goes to show that we, as agents, can rarely go wrong by taking nothing for granted," is quite true. But boy it is difficult to remain positive in an arena where it is imperitive that we operate from the perspective, that whatever can go wrong, will go wrong. But increasingly, remaining vigilant is important.

Jan 30, 2009 11:32 AM

Tammy Lankford,

Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA

Broker GA Lake Sinclair/Eatonton/Milledgeville

They have made us have some large earnest money on our bank owned listings, but so far none of them has had us send them the money before closing. Of course we don't have escrow in Georgia. One closing, bam, you own it and get the keys right at the attorney's office.

Jan 30, 2009 11:50 AM

Barbara S. Duncan

RE/MAX Advantage - Searcy, AR

GRI, e-PRO, Executive Broker, Searcy AR

Some people are wanting to give no earnest money on regular contracts. I still like to have at least a token amount. Since I don't do short sales, I don't know how it would work with them.

Jan 30, 2009 01:21 PM

Paula Swayne

Dunnigan, Realtors, Sacramento (916) 425-9715 - Sacramento, CA

Realtor-Land Park, East Sac & Curtis Park -Dunniga

Gotta love foreclosures and southern California escrow companies! I hate to say it, but just as the demands that southern California agents put on title companies caused a backlash of limitations to title companies, we will probably have the same thing happen with escrow companies. The outrageous fees that southern California escrow companies are charging are inexcuseable...I am justs waiting for someone to finally take them to task!

Jan 30, 2009 01:57 PM

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Hi Jesse: I suspect that the banks are doing the best they can with what they've got.

Hi Jaded: Whew. Thanks for clarifying that.

Hi Myrl: Vigilance is paramount, as you say, but I can spend most of my time trying to head off problems at the source and something else will pop up to keep my day "interesting." :)

Hi Tammy: So, how do you handle closings in Georgia then? After the purchase contract is signed, does the seller's agent give you the disclosures, and then everybody waits for loan approval without third party involvement?

Hi Barbara: Don't your contracts in Arkansas require a deposit to be valid?

I'd really like to learn more about the technical aspects of transactions in other states. I've dealt with real estate only in Minnesota, Colorado and California. I've had clients who have purchased property in other states when I represented them, but we escrowed those transactions in California.

Hi Paula: Southern California escrow companies have always charged more, but then they do most of the work upfront and not on the backend like we do in northern California. Fortunately, my clients don't pay the escrow fee because I make the banks pay it.

Jan 31, 2009 01:14 AM

Anonymous

Edward Pham

For REO, even if the bank makes the EMD non-refundable, do they return it if the buyer conducts the home inspection and decide not going forward with the purchase within the inspection period ? The bank should return the deposit money in this case, right ? Thanks.

May 01, 2009 04:55 AM

#17

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Sorry, Ed. No. In California, the buyer is free to cancel a contract within a specified period of time, but if the deposit is made non-refundable, the deposit goes to the seller. A good lawyer, though, could argue and insist that the deposit be returned to the buyer. But non-refundable means non-refundable. That's why if I receive a verbal approval and know the lender will make the deposit nonrefundable, I have the buyers immediately perform a home inspection before they sign the bank's addendum.

May 01, 2009 05:20 AM

Anonymous

Edward Pham

That's what I told my friend to do since I learn it from reading your blog. But I guess it is case by case. My friend is in contract to buy a REO in San Jose, CA from Indymac. The bank requires a non-refundable deposit. The addendum states that my friend has 7 days after the date of the addendum for inspection. She can terminate the contract within this inspection period and the bank will refund the deposit back to the buyer. If you were my friend's agent, would you still advice her to perform the inspection before signing the bank's addendum ?

May 01, 2009 06:10 AM

#19

Elizabeth Weintraub Sacramento Broker

Elizabeth Anne Weintraub, Broker - Sacramento, CA

Put 40 years of experience to work for you

Oh, well, if the bank is giving the buyer 7 days to do a home inspection and is willing to return the deposit upon cancellation during those 7 days, then you shouldn't have any problems. I just canceled an REO contract for a buyer, and the bank promptly returned the deposit.

May 01, 2009 06:28 AM

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Broker-Associate at RE/MAX Gold, Midtown and Sierra Oaks Sacramento office. Co-partner Weintraub & Wallace Realtors. Selling since 1974. Homebuying expert at The Balance. Weintraub & Wallace sells homes from Galt to Lincoln.
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Author Bio: Elizabeth Weintraub is a Sacramento real estate broker, author, home buying expert for The Balance, a Land Park resident, who specializes not only in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento but sells extensively from Elk Grove to Lincoln. Weintraub is prominently known as the #1 Sacramento Short Sale agent throughout the Sacramento four-county area. Call Elizabeth Weintraub at 916.233.6759. Put 40+ years of real estate experience to work for you.

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