How do I protect my deposit when buying a home?

Simple answer:  Do what you said you would do when you signed the purchase contract.

I follow and participate on many public forums in regard to real estate (like TRULIA, ZILLOW, YAHOO, and ALLEXPERTS) and more and more I see questions from buyers and sellers about who deserves the earnest money deposit on a home purchase when things do not go according to plan.  There are several reasons why this has become a big issue in this housing market.

First, it seems like a long time ago but it was really only about three years ago when deposits were merely numbers on a page.   If a buyer canceled a purchase contract, many sellers did not want to pick up the rope and play tug-o-war over the deposit because they would simply be wasting time while new buyers were waiting at the door ready to write a higher offer.  It also meant sellers did not have much patience for late contingency releases and were quick to issue a notice to perform to any buyer that could not stay on time with their purchase.  The pressure was on the buyer to keep up or lose the deal.Real Estate Deposit tug of War

That was also a time period when FHA loans did not exist in Northern California and unless you had a real loser for a loan officer, most buyers could obtain loan approvals quickly and close the deal within 30 days.  Not so much anymore,  underwriters are actually asking to see the proof of all those items written on a loan application and the scrutiny of facts has become more serious than a game of master chess.  FHA loans, in many ways, have saved our local housing market.  With nearly 25% of all loans completed in 2009 FHA loans and some predict that number is around 35% for 2010, FHA loans are critical to our housing recovery.  With that said, everyone knows any bus driven by the government is a slow one.  Approvals average 45 days unless you have a darn good FHA loan officer.   Slowest FHA approvals in my opinion come from the big banks.  Fastest approvals come from direct lenders, mortgage bankers that have FHA underwriting in-house.   Anyone working in this real estate market now understands that loan approval and time lines are absolutely without question one of biggest parts (if not THE biggest) of moving a transaction toward close of escrow.

Secondly, communication is more critical than ever in a real estate transaction.   I pride myself on being tech savvy and I have made deals over text that worked out.  But really, my best skills are face-to-face or at least phone-to-phone discussing the details of the offer and quite honestly, selling my client, myself, and my loan officer on our ability to close the deal and stay on time.   If you have an agent that doesn’t return calls promptly or for that matter simply doesn’t believe they need to talk to the other agent, find a new agent.  Seriously.   If they do not know how to communicate effectively with the other side, they will not be representing you  in the best possible way.  One more point regarding agent commitment, in this market every deal should be of up most importance.  If the agent is too busy, too popular, too naive, too arrogant, too… find another agent.  This is a profession that took a direct hit to the pay check when the market crashed.  If your agent is not working for you, if you can’t tell, find another one.  Equally, if you are the  buyer or seller that  does not take the whole transaction seriously, move on.  I am committed and work hard, I don’t have time to take you on a joy ride.

Third, read the contract.  Yes, seems like a huge NO-DUH but I can not tell you how many buyers and sellers do not read the contract and understand their obligations.  Ask questions, test “what-ifs”, ask your agent for examples of what happens when that happens and all the other stuff you don’t get or understand.   Be clear on the time lines.  If the buyer does not release contingencies when they said they would in the contract, understand your rights as a seller under the notice to perform clause.  This tells you what your rights are as a seller to “demand” the buyer perform or you will have the right to cancel the contract and find another buyer.   Understand as the contract as a  buyer.  Ask your agent about strategies if time lines fall behind and dates do not look like they will be on time.  Plan to request an extension before the due date, not after.  Sellers do not typically have a line of buyers waiting in this market and would prefer this deal  go through if possible.  But respect their situation as well and do not cause them extra stress by not communicating issues through your loan officer and real estate agent.  Make sure you read and understand the contract’s paragraph on deposits.  For the California Association of REALTOR®s contract, this is item 14, item F.   This paragraph stresses the “mutual agreement” of cancellation  before escrow can release deposited funds.

Finally, did I say do what you said you would do when you signed the contract?  The deposit is no different than any other deposit.  If you didn’t clean your apartment before you moved out, did you really expect to get your deposit back?  Who deserves a deposit when a deal goes bad is based on the legally defined term “breach of contract”.  It ask the question: “Who didn’t do what they said they would do as it is defined in the contract?”.  Breach of contact is also surrounded by the contractual concept of “time is of essence” .  The contract itself and specifically these two contractual components are the bottom line of any mediator’s, arbitrator’s, or court’s decision regarding who owes whom.  If  you are in doubt about your rights or position regarding breach of contract, consult a real estate attorney.

If you are wondering whether or not you will get your deposit back, you are probably behind on the contractual thought process.  Know in advance your obligations, your risk, and methods for protecting your earnest money deposit prior to ever writing the check and allowing it be deposited into escrow.  If you are not comfortable with the plan and the potential exit strategy,  don’t put your money on the line.   Best predictions are surrounded by protection.

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