Where's My Money?: On Keeping the Buyer's Initial Deposit

Services for Real Estate Pros with Martinelli Caputi & Associates, Ltd.
OK real estate gurus. Here's a situation you never want to find yourself in. I received an email from a Realtor friend of mine. His client (Seller) found herself at the end of the road called "Dead Deal." It went a little something like this:

- 1. The parties (Seller and Buyer) have signed the Purchase and Sale (P&S) Agreement. Everything looks dandy and you're just waiting for the inspection and financing confirmation.
- 2. The inspection is in. No problems.
- 3. Bad news. The original lender for the Buyer is out of business.
- 4. No problem. We can sign an extension for the P&S. We'll find another lender and I'll call you tomorrow.
- 5. We need another extension. (aka - My client went out and bought a brand new car and now his credit is less-than-optimal).
- 6. Let's sign a new P&S (we have a new lender... don't worry).
- 7. Extension #2.
- 8. Extension #3.
- 9. Dead Deal. Obviously.
- 10. Seller: "Don't I get to keep the Deposit? My property has been off the market for 3 months waiting for this fool (Buyer) to find financing!!!"
- 11. Phone call from the Realtor: "What do I do?"

So. Guess who receives the phone call? Your friendly real estate attorney of course!!! Unfortunately I've been down this road before. In a court of law. With the coveted Deposit as the main prize. The only problem is that the Deposit isn't always worth hiring a bunch of expensive attorneys to fight tooth-and-nail. Luckily my Realtor friend placed himself in a great position before going down this lonely road. It involved a nice little sub-paragraph:

"26. (h) The BUYER agrees to forfeit all Deposit(s) being held by the REALTOR to the SELLER immediately if the BUYER fails to perform on this Agreement by the Date and Time specified and stated in Paragraph 8."

Can I get an Amen?!!

The only question that remained from my good ol' Realtor friend was... "Well, can I disburse the Deposit funds to the Seller now that the deal is dead?" Ahhh... good question ol' chap. Here's my nutshell answer. Now I know that this may not be the best answer (and do not construe this as legal advice!!!). This is a professional opinion based on experience. I would be delighted to hear about all of your experiences in the arena of the Dead Deal. :)

Technically you can hand over the Deposit to the Seller. The P&S Agreement explicitly states that the Seller will receive the deposit if the Buyer fails to perform by a certain date (sometimes extended by our friend the "Extension"). However, the Buyer may (in some Courts) have a decent argument for an “Equity” or “Equitable” claim if he loses a large sum of money (the Deposit). The theory behind this argument is that the Seller has received a benefit (referred to as a large, unfair, inequitable windfall by the Buyer's attorney) without having conferred any value upon the Buyer. The defense (Seller’s) for this argument is that the Seller has lost valuable time on the real estate market after he entered into the P&S (no offers may be accepted during this period) and during the entire period that the Buyer failed to perform (P&S, extensions, expired P&S, new P&S, more extensions, etc). It’s difficult to place a value on this time but with the current state of the market, this is quite a good defense!

So, what is the attorney really saying here? Well… you can release the funds to the Seller but I would prefer to have a release signed by the Buyer. This is a typical cover-your-derriere situation. Technically, no release is needed. However, you may be able to avoid costly litigation if a release is signed. During a conversation with the Buyer, I would couch it in terms of “I am bound by the P&S agreement to release the funds to the Seller and I would prefer that you sign a release acknowledging the release of such funds.” Get the release signed... it might save you. I’ve also witnessed situations in which the Buyer will politely ask the Seller for a return of half of the deposit and the Seller has complied (or at least came close -- again, the old honey vs. vinegar rule works!). Some Sellers will recognize that they’re receiving a large sum of money without suffering a comparable loss. If that is the situation, you can thank your lucky stars! Now just cross your fingers that you never find yourself in this position!!!

Any questions? Give me a call at 401.921.5114, extension 17.
Richard M. Bianculli Jr., Esq.
Supreme Title and Escrow, Inc.
171 Service Ave, Bldg 2, Suite 302A
Warwick, RI 02886
E-mail me at rbianculli@supremetitleri.com
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Tatyana Sturm
Exit Realty DTC - Aurora, CO
Denver Realtor, GRI, Denver/ Aurora CO Relocation

I have been in this situation personally my self on both ends this year.  First time I was purchasing a lot and i could not get the construction loan through w/o a ton of money.  I extended the closing date once so it was off the market for maybe 45 days.  Never-the less with changes in the mortgage industry in the previous 6 months, I lost my earnest money and there was no negotiation about getting any part back which really pissed me off.  Because a few months before that on a property that I had flipped was under contract and I extended 2 times and these people could not close because of financing and I choose to return the earnest money after being off the market for more than 60 days.  So I am not really sure what I'll do next time.  Times are harder now than ever in this market for me, so I guess I 'll have to figure it out when the situation presents itself.

Nov 14, 2007 01:31 AM #1
Martinelli Caputi
Martinelli Caputi & Associates, Ltd. - Warwick, RI
& Associates, Ltd.
Tatyana - It's definitely a sticky situation.  Thanks for the comment!  I was wondering if anyone had a similar experience!  :)
Nov 14, 2007 04:10 AM #2
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