By JIM SMITH, Realtor®
There is a little-noticed provision written into the state-approved real estate contract to buy and sell real estate that could blindside a buyer and cause him or her to lose their earnest money and not get the house they think they’re about to purchase.
I’m referring to Section 4.4.2 of the Contract to Buy & Sell, which reads as follows: “All funds required to be paid at Closing or as otherwise agreed in writing between the parties shall be timely paid to allow disbursement by Closing Company at Closing OR SUCH PARTY SHALL BE IN DEFAULT.” [caps in original]
Although I’ve never seen it happen, that section of the standard contract allows a seller to declare a buyer in default if all funds have not arrived at the time of closing. With default thus established, the seller gets to keep the buyer’s earnest money and then proceed with a back-up contract.
This has not been a big fear in the past, but now that we’re seeing multiple offers on listings, it could very well happen. (Let me know if you've seen this happen!)
How does a buyer’s agent prevent this disaster from happening? It’s pretty simple — write into the contract that the time and place of closing is set by the buyer’s agent, not the seller’s agent, and not by “mutual agreement.” This would allow the buyer’s agent to announce that the closing is postponed and keep postponing it as late as midnight that day. (Only the day of closing is specified in the contract.) If the contract lets the listing agent set the time and place of closing, then make sure all funds are wired the day before a morning closing.
Last fall I represented a buyer in the purchase of a home where the seller tried every trick in the book to terminate the contract. The best of those tricks was to cloud title to the property so that my buyer’s lender wouldn’t fund the closing.
The title company refused to issue a title commitment because of the cloud on title, but I was able to convince them to schedule the closing anyway so that the buyer could prove readiness to close. (It was the refusal to issue a title commitment that was the specific reason the lender wouldn't underwrite a loan and wire funds.)
I knew that if my buyer couldn't have sufficient funds in the closing company's hands at the time of closing, the listing agent could show up, declare my client in default, demand forfeiture of $5,000 earnest money and terminate the contract. Since the lender wouldn't send the funds, I convinced my Buyer to withdraw sufficient funds from her IRA and wire them to the title company in time for closing. (Without this ability to produce cash at closing, we would have been forced to accept termination, hopefully in return for release of the earnest money.)
The buyer and I showed up for the closing and, in the absence of the seller and listing agent, we were able to declare the seller in default and demand specific performance. Within a few weeks, the seller relented, removed the cloud on title, and agreed to a closing. The seller realized -- and we knew she would -- that if she had not relented, the buyer would have prevailed in court and not only forced the sale, but the seller could have been required to pay for the buyer's legal costs and even damages. By relenting, the seller only had to pay her own legal costs.
My buyer's lender processed the loan and got the funds to the title company in time, and the title company wired the IRA funds back to the IRA account. Best of all, since the funds were gone for less than 60 days, there was no penalty on the funds' withdrawal.
PS: This scenario was only possible because I fully understood critical aspects of the contract to buy and sell real estate. (I also had a good real estate lawyer to advise and represent my buyer.) If, instead of hiring me, my buyer had dealt directly with the listing agent or had an agent of her own without such knowledge, this story might not have had the happy ending it did for her.