Earnestly, there has to be a better way to kill a deal

Friday, July 19, 2019, Vol. 43, No. 29

During the first couple of hundred years of the country’s existence, there were various contracts used by buyers and sellers of real estate to help them agree on the terms and conditions of sales.

By 1970s, real estate firms used similar, if not identical, contracts.

As transactions became more complicated and society grew more litigious, contracts expanded broadly from the previous two pages.

Many of the forms, disclosures, disclaimers and agreements were created by the legal team assisting the forms committee with the group formerly known as the Tennessee Association of Realtors, now simply the Tennessee Realtors.

More than 28,000 Realtors use these forms on all of their transactions as their brokers have put the fear of God in them, warning them that improper use or failure to use these forms will earn them a quick trip into real estate hell or, even worse, a courtroom.

All of the elements now required – including Confirmation of Agency, Property Disclosure, Disclaimers, Listing Agreement and the Buyer Representation Agreement can now amount to more than 30 pages.

One of the more important and most vilified items is the paragraph that pertains to earnest money, now often referred to as trust money.

Here’s the burning question: “What happens to the earnest money if buyer exercises one of the contingencies in the contract and terminates the deal?”

In the past, most earnest money was held in an escrow account with the real estate firm that had the property listed. Due to the ever-growing arguments over the release of the earnest money, many title companies now hold the funds.

For that money to be released, a form has to be signed by the buyer, the seller, the principal broker of the listing firm and the principal broker of the firm representing the buyer.

It is not always difficult for the parties to agree where the money should go. Sometimes it is.

Most contracts contain at least three contingencies that allow buyers to walk:

1. Loan problems

One concerns financing and allows the buyer’s money to be refunded if that buyer applies for the loan in the time limit set forth in the contract, pays applicable fees and is rejected for the loan.

This situation rarely occurs because a real estate broker would not normally bring an unqualified buyer into the house.

2. Appraisal lower than sale price

As was belabored a few weeks ago in this column, the appraisal contingency is included in almost all contracts.

When the appraisal contingency is in force and the property does not appraise for sales price, the buyer may terminate.

Once again, sellers usually relent and allow the earnest money to be refunded. By then, the buyer has paid for a credit report, an inspection and the appraisal.

With the abundance of good faith exhibited by the buyer – coupled with the fact that the buyer has no role in the appraisal – the sellers feel they have no choice but to release the funds.

3. Home inspection

The third possible contingency – inspection – is the thorniest.

Many sellers feel the buyers, inspectors and real estate brokers are in cahoots with the inspectors to conjure deficiencies in order to rob the sellers of their equity.

They do not believe the findings of the inspectors, rebuke the reports as unwarranted and refuse to make the repairs.

For years the contract was very buyer-friendly and basically stated the buyer could terminate for any reason after the inspection, even if the buyer was the inspector.

Not only that, the buyer was not required to provide a reason for the termination.

With that loose language in place, many people feeling buyer’s remorse chose to use the inspection as their excuse to terminate.

Sellers began refusing to sign releases, and the listing broker could not refund the money to either buyer or seller.

At that point, the listing firm might choose to file a cause of action known as an Interpleader, in which case the buyer and seller would become defendants. One attorney estimated that the cost to get the money could be as high as $7,000.

Not to second guess the Tennessee Realtors, but two former Tennessee Realtors, megaproducers both, Rory Jensen and Kim Jensen, now practicing in New Mexico, shared the manner in which the New Mexico Association of Realtors has escaped this wrangling.

In New Mexico, Realtors have adopted a “time-off-market fee.” In this situation, the buyer pays the seller a fee to allow the buyer to have a look under the hood. There is no earnest money deposited until the time period is passed and the buyer, having done the due diligence, decides to proceed with the sale.

The TOM fee is paid directly to the seller and is not credited at closing as it is a fee for taking the property off the market.

The Jensens say the process is working well in New Mexico, and California has adopted a similar practice.

Richard Courtney is a licensed real estate broker with Fridrich and Clark Realty, LLC and can be reached at richard@richardcourtney.com.