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Make a contract harder to break

Q: I had a few acres of rural property that I put on the market. I received an acceptable offer along with a deposit. Before the closing, the buyer withdrew the offer for a reason that was not listed on the contract. The buyer's Realtor requested the deposit back, and my Realtor told me it wouldn't be worth fighting, so I followed her advice. Later, I received another acceptable offer, but the same thing happened, as the buyer withdrew for a lame reason. Again the listing had been removed, and the deposit was returned.

I thought that a contract was legally binding, and that if a buyer withdraws an offer for a reason not specified on the contract, he or she will lose the deposit. Am I wrong in my thinking? If not, what can I do to make sure this doesn't happen again?

A: In order to have a valid and binding legal contract, three elements are required: (1) an offer, (2) acceptance of that offer, and (3) consideration. Usually, the earnest money deposit will satisfy the third requirement, but consideration can also be where the seller takes the property off the market in reliance on the contract.

Often, buyers will place contingencies in the sales contract — such as the ability to get appropriate financing; making sure the house appraises at least to the contract price; or the buyer must sell his or her house first.

These contingencies should have a time limit imposed, whereby if the buyer cannot remove the contingency, the contract can be declared void at the option of the seller. (Note: In today's market, a seller may not want to lose a sale and will agree to extend a contingency for a reasonable period of time.)

If the buyer wants to back out of the contract using excuses that are not listed in the signed contract, I would consider this a default and (depending on the terms and conditions of the contract) you would be entitled to keep the earnest money deposit.

Your real estate agent advised you to release the deposit to the buyers. Did you ask why — other than it would not be worth the fight? Obviously if the buyer does have a valid reason, you probably would not want to have to go to court to litigate who gets the money.

Keep in mind that although the buyer may be in default, unless he signs a release authorizing the holder of the deposit (called an escrow agent) to give it to you, the money cannot automatically be released. A basic rule of law is that when money is held in escrow (such as the earnest money deposit) the escrow agent cannot release the funds unless the parties agree or a court gives its authorization.

In my opinion, you should have challenged your agent, and perhaps even discussed the situation with an attorney.

How do you protect yourself? First, make sure that the deposit is large enough to make the contract buyer hesitate about trying to walk away from a contract. Second, should someone want to back out of another contract, make sure that you know the specific reasons, and that those reasons are specifically stated in the sales contract.

In foreclosure

Q: If your home is foreclosed on by your mortgage lender: 1) Will the lender go after you if the house sells for less than you owed? and 2) If there are two loans on your house, what is the role of the second mortgage (trust) holder?

A: Because my column is national in scope, I can give you only a general response. Foreclosure law is based on state laws.

Your first question involves what is known as a "deficiency." If, for example, you owe the lender $150,000, but the home sells at the foreclosure sale for $125,000, there is a deficiency of $25,000. Some lenders when they pursue foreclosure will start the bidding process at the amount of the outstanding balance, while others will set a lower minimum bid.

Some states do not allow the lender to go after you for the deficiency, while other states do.

You also asked about the role of a second trust lender. In general, if the first trust holder forecloses, it wipes out the security of the second lender. If the second lender forecloses, anyone who buys at the foreclosure sale takes ownership subject to the first mortgage. So the buyer steps into the shoes of the homeowner who was foreclosed upon and owes the money on the first trust.

But even if the second trust holder's security is wiped out, you are still obligated to pay that lender. When you borrow money to buy or refinance a home, you sign two legal documents: the deed of trust (or mortgage) and a promissory note. The second trust note remains valid even if the trust has been eliminated.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. He can be reached at benny@inman.com.

Make a contract harder to break 01/09/09 [Last modified: Wednesday, November 3, 2010 9:42am]

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