LawsonGroupMediation

I was asked to comment on what to do when buyers walk away upon receiving approval of a short sale, specifically whether they may be entitled to get their earnest money back.

Actually, this is part of a larger issue. But, let’s take this step by step.

When buyers submit an offer on a property, it becomes a purchase contract upon payment of the earnest money. The money is the “consideration” element required to form a binding contract. If the buyers walk away in violation of the contract, there is a breach of contract.

The question becomes, first of all, was the act in violation of a binding contract? If the answer is that it was indeed in violation of the contract, then the seller is entitled to whatever damages can be proved. In normal home sales, there is a widespread acceptance that when buyers breach purchase contracts, the earnest money goes to the seller as liquidated damages. The time and cost of filing a lawsuit is great enough that most sellers just keep the earnest money.

The problem is, however, in short sales, that walking away after lender approval of the short sale often leaves no time to find another buyer before losing the home to foreclosure. Thus the damages of losing the home are so great that the earnest money likely does not begin to cover the losses. The sellers and their agent may have a cause of action for a lawsuit far exceeding the amount of the earnest money.

So, the simple answer is, if walking away is not inviolation of a binding contract, the buyers are generally entitled to their earnest money, as the contract made the sale subject to… certain contingencies. If there is a breach of that contract by the buyers, then they at least would forfeit the earnest money as liquidated damages.

This is a good place to state that I am not giving a legal opinion or legal advice. I am merely providing general instructional information, and you should consult an attorney licensed in your state concerning your specific fact situation.

If the buyers’ contract contained language that allowed for an easy out, then no breach has occurred. However, even if there is a binding contract and the property is accepted “as-is”, a court might not enforce the contract if provisions are held to be “unreasonable” or “against public policy”. With the length of time short sales are taking to obtain approval, a local court might hold the length of time to be unreasonable, especially if there is no language in the contract as to the length of time permitted for third party approval.

For this reason, the agents working with our firm include specific language to provide a time frame the buyers must give for this approval. The language is contained in our book, Short Sales and Loan Modifications: A Practical Guide For Real Estate Agents & Investors.

Another issue is the sellers’ agent liability when a buyer walks. Naturally, sellers expect their agent to remain true to their fiduciary responsibilities. When a buyer walks and the sellers end up in foreclosure, they may attempt to hold their agent liable for not requiring a binding contract. For this reason, we provide in our Short Sale Business Manual a Binding Contract Waiver that sellers are required to review and sign in the event they are provided with a contract that does not fully bind the buyers for the duration of the time needed for lender approval. This Waiver protects the agent from potential later legal action by the sellers upset over having lost the short sale and then the foreclosure.

Here at the TheLawsonGroup, we are dedicated to protecting agents from potential liability. There are many lawsuits against real estate agents across the country, and it is important for agents to stay educated about the liability traps and protect themselves.

In summary, the answer about the earnest money is that if there is no breach, they get their money back. If there is a breach, the earnest money may be accepted as liquidated damages instead of a lawsuit.

This issue sparks a lot of discussion, and if any of you wish to talk to me directly about it, please do not hesitate to email or call me.

Best wishes,

Ken Lawson JD

TheLawsonGroup Mediation Services