Best of the Hotline: Is the buyer entitled to her deposit?

Here is a Hotline call that involves two issues. The caller is a buyer’s agent whose client made an offer to purchase a home at short sale. Like many agreements to buy at short sale, this agreement obligated the buyer to make a mortgage application only after the sale was approved by the seller’s lender. Like many short sales, it took a very long time for the seller’s lender to approve. Only then was the mortgage application made and only then did the parties learn that the buyer was rejected by the lender identified in the agreement.

The buyer was naturally upset to lose out on the deal. The seller, however, was livid. His desire to get out from under his debt obligation was postponed, if not dashed after so many months. His anger was directed to the buyer with whom he would not enter a release allowing for a return of buyer’s deposit. In addition, the property was relisted for sale.

Q. Is the buyer entitled to her deposit? May the seller relist the property for sale in the absence of a release?

Yes, to both. As for the deposit, the agreement was contingent upon the buyer obtaining a mortgage loan, which she did not.  Assuming that she made a good faith effort and submitted an honest application, she should get her deposit back.

This answer probably surprises no one. No one that is, except the seller who was furious to learn after so many months that the buyer could not get a loan. Unfortunately, the deal struck by the seller allowed the buyer to wait until after his lender approved the short sale to make a mortgage application. This is probably as it should be since it makes little sense to seek a commitment that has a limited shelf life.

The problem is that the seller never contemplated losing the deal once his lender approved of it. Did the listing agent review the possibilities? Aside from considering all the possibilities, what else could have been done to better protect the seller?

One answer would be to thoroughly review the buyer’s financial information and the quality of any preapproval or prequalification issued by a lender. A further alternative, one I dare say is rarely considered, is to make a portion of the deposit nonrefundable.  This could be done at the signing of the agreement or the lender’s approval. Regardless, the buyer did nothing wrong and the agreement makes clear that it was contingent upon the buyer being approved for a loan.

As for the second issue, yes the seller can relist the property despite the fact that there is a dispute over the deposit money. That there are rival claims to it does not constitute a lien on the property that would prevent a subsequent buyer from purchasing it and the acquiring marketable title. The dispute is over the deposit money and not over the buyer’s right to purchase the property, which the buyer cannot do anyway. The seller, already in distress, cannot afford to let matters linger and therefore by promptly listing the property he may stem the hemorrhaging.

There are occasions when a property should not be listed in the face of a failed transaction. If the buyer claims the right to buy the property and seeks to do so, then selling it out from under him may be impossible. A buyer with a legitimate claim to purchase could seek to enforce that claim by filing a lis pendens, which places a cloud on title and would preclude it from being sold to a subsequent purchaser.

We can usually distinguish a buyer who legitimately seeks to acquire title from a buyer who files a lis pendens for the sole purpose of extorting the seller into returning a deposit. The latter constitutes a slander of title which may be the subject of a civil lawsuit.

It is understandable that the seller in this example is upset, but the object of that blame lies with his side of the equation. That he did not understand the potential consequences and that he took no steps to preclude them in the agreement is not the buyer’s fault.