- The Washington Times - Thursday, June 30, 2005

Q: I own a condominium in Northern Virginia and listed it for sale. In the first week I received several offers and my real estate agent and I decided to accept what we thought was the most solid deal. The buyer offered me full price, provided an approval letter from a lender, waived the home inspection and appraisal contingencies, and wrote an earnest money deposit of $2,500. The situation seemed ideal.

The day before settlement, I learned that the buyer disqualified herself from the loan by opening up a new line of credit. I gave the buyer three days to come up with alternative financing, but she was unable to secure a loan.

The buyer then submitted a release statement that would terminate the deal and return her earnest money deposit. I thought that I should keep her money because she defaulted on the contract. My agent advised that I sign the statement, return her money and start over. She said that I could pursue legal action but that could cost more than it’s worth. My agent also said that the buyer could file a lien on the property, making it more difficult to sell to the next person.

I ultimately signed the release and returned her money, but I feel as if I was given bad advice. Where did I go wrong?

A: This really isn’t a mortgage question but I’ll certainly give you my thoughts.

This is a legal issue, and your agent is correct in advising you to consult a lawyer if you had chosen not to sign the release. You would have needed to ask the lawyer a lot of questions. Here’s what I would have done.

First, I would have insisted on a larger earnest money deposit. Most real estate agents agree that a large check up front is a strong indication that a prospective buyer is serious about purchasing the property.

A buyer that defaults on a ratified contract does, indeed, risk losing his earnest money deposit.

If the buyer gave you an approval letter from a lender, how could she have been subsequently “disqualified”?

In most cases, lender approval letters are subject to verification of disclosed information.

Perhaps your buyer didn’t accurately disclose her financial picture.

I would have spoken with the lender to find out exactly why her loan approval was rescinded.

You mention that the buyer “disqualified herself.”

Does this mean she changed her mind about buying your condo and purposely changed her financial picture in order to get declined for the loan?

If so, it sounds to me like a clear case of default.

This is where it gets sticky. Even if the circumstances portray a blatant contractual default by the buyer, you are not automatically entitledto receive the earnest money deposit.

If the buyer wants her deposit returned, and you think that you’re entitled to the money, this is where litigation comes in.

People disagree on things all the time, and it’s up to the courts to settle the disagreements.

This is why if I were the seller, I would have insisted on a bigger deposit.

If you had decided to litigate, you could have sued for the deposit.

You could even have sued for specific performance and tried to legally force the buyer to purchase your house. Of course, these things aren’t always practical.

We are still in a market that heavily favors sellers, so, hopefully, by the time you read this you will have already sold your condo to someone else at a better price.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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