First, a big shout-out to our three readers for hanging in there with us while we took a short sabbatical. Nothing says vacation like a little time in a mountain cabin. By the numbers, ours involved one leaking faucet, one broken toilet, one laundering appliance that has decided heat is not an essential element in the drying process, and an empty bag where about three pounds of peanuts used to peacefully reside. We solved that last mystery, and because we are pretty sure our arsenal of squirrel food didn’t migrate lock-step to our bedroom closet by its own devices to shell itself, the exterminator has been summoned.
Clearly, our reunion post should address the dangers of deferred maintenance. But, where’s the fun in that? Instead, I’ll tackle an “Ask the Broker” question I returned home to regarding the purchase contract and a buyer’s failure to perform. It’s an issue we have unfortunately been faced with ourselves too often these days. James (not his real name) wrote:
We signed three extensions for our buyer because he was having trouble getting his loan approved. We are currently out of contract by about 3 weeks. The buyer cannot get the loan, but will not sign the cancellation of escrow. Our agent keeps telling us the buyer is out of town. What are our options? Our house is back on the market, pending cancellation of escrow, but no agent wants to show it under these circumstances.
This is where I am obligated to insert the proper disclaimers, stuff about how I am not an attorney, how I am not in a position to pretend to be an attorney, and how someone in this situation should consult an attorney (which I am not). There – I said it.
Forgetting the specifics for just a moment, this whole idea of being “out of contract” is becoming an ongoing saga for us in so many of our transactions. To our three readers, you undoubtedly only see the glamour of our work – the front end of teetering on our stylish, moderately priced pumps ankle deep in the gazania playing “find the lockbox” and the back end of making the congratulatory “you closed escrow” call. It’s everything in the middle that has been brain damage lately.
The contract (and I am talking about the California Association of Realtors “little “R” contract here, since I live in California) is packed full of timeframes. The idea is that there are all of these little things which must be checked off of the to-do list along the way. They involve obligations of both the buyer and the seller, and there are typically two big events during the course of escrow.
The first concerns contingency removal. Our contract’s default language calls for the buyer to remove all contingencies by the 17th day following contract acceptance. This is simple enough, except it rarely happens these days without divine intervention. Loan underwriting takes longer, appraisals take longer, and the first appraisal is seldom good enough in the lender’s eyes, so we must rinse and repeat. Mostly though, buyers and their agents just don’t take the deadlines seriously.
Our contingency removals are accomplished using the “active method;” in other words, unless the contingency is removed in writing, it continues to live and haunt. Without written contingency removal, the buyer can take his deposit and go home, so sellers are generally in a pattern of holding their breath until it occurs. But what happens if it is time for the buyer to submit written contingency removal and he doesn’t? This is where seller-land can be a bummer. The buyer holds the cards, has the seller over a barrel so to speak. The seller can issue a Notice to Perform and then cancel, but the buyer gets his money and the seller is without a sale. Give the buyer more time to perform, and the seller is living on a day-to-day lease with no guarantee the sale will ever happen. In a declining market, time is truly of the essence to the seller. Having to start over again after two or three or more weeks is not only no fun, but it’s not advantageous financially.
But, back to our question which involves the second big event — close of escrow. In this case, I was told that the buyer had removed all contingencies. The real issue is that the buyer cannot obtain financing, so the seller is resigned to the fact that there will be no sale, at least not with this buyer. In a normal world, the seller would release the deposit, wave goodbye, and set about marketing their home again. For whatever reason, however, this buyer will not sign cancellation instructions. This means that the seller is saddled with an open escrow.
Unfortunately, the buyer has to agree to a return of the deposit. The purchase agreement is a bilateral contract; it takes two to get married and it takes two to break up. Escrow is a neutral third party charged with seeing that the terms of the contract are fulfilled. Escrow cannot change the terms with only the consent of one party. So, when our buyer here decides to be ornery and not sign cancellation, the seller is stuck at least temporarily with an open case. While the seller could enter contract with another buyer, the sale would have to be subject to the cancellation of the previous escrow. One sale can’t close as long as another is still open.
So, what’s the remedy? Now, it is really time to consult your attorney. Here is what the contract says:
If Buyer or Seller gives written notice of cancellation pursuant to rights duly exercised under the terms of this Agreement, Buyer and Seller agree to Sign mutual instructions to cancel this sale and escrow and release deposits to the party entitled to the funds, less fees and costs incurred by that party… Release of funds will require mutual Signed release instructions from Buyer and Seller, judicial decision, or arbitration award (emphasis added). A party may be subject to a civil penalty of up to $1000 for refusal to sign such instructions if no good faith dispute exists as to who is entitled to the deposited funds.
In this case, since the seller just wants to move on and the buyer is not performing, and since the buyer is refusing to sign cancellation instructions, we are left with the mediation/arbitration process or legal suit. I know — $1000 is not such an impressive consolation prize, but that is the contractual hammer.
There is a lot more to the whole breach of contract conundrum, of course, but to the one hearty reader who didn’t move on to the Huffington Post three paragraphs ago, call me and we can chat. We can start by discussing the importance of requiring a significant deposit from the buyer, not just one that was funded by the loose change in his sofa.
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
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{ 8 comments… read them below or add one }
Kris, I’ve been getting the blog via RSS for months now. As such, you could go away for six months and I would still get the notice when you post again.
You paint a depressing picture. Glad we’re not currently in a position to worry about that!
Aloha, reader no. 4 checking in. You got me with: “teetering on our stylish, moderately priced pumps ankle deep in the gazania playing ‘find the lockbox’.”
You and Steve sure have some cool games to play ….
Happy Summer!
Jim – I’m in your RSS? Cool.
Smithers – Nice to hear from you. Thought we lost you. But the whole “four readers” thing is feeling like a big paradigm shift. I had better step up my game.
You sell yourself short with the repeated claims of three readers. Per Google Reader details on the feed:
Feed URL: http://sandiegohomeblog.com/feed/
Posts per week:1.2
Subscribers:109
On my Trends page, I see I have read 5 items in the past 30 days from this feed.
Google’s definition of “read” is “opened;” I can’t commit to having read every word you’ve written, but knowing the way I use Reader the titles were at least catchy enough to get me to open all five items.
I must have missed it, but what is the amount in escrow?
Doug – Only three figures.
Kris:
You should be able to get more than the $1K civil penalty in a suit – at the very least, you should be able to recover attorneys fees, which means the hammer should be at least $20K. (I haven’t read those form contracts in a while, but I’d expect an attorneys’ fee provision.)
Daniel – Spoken like a lawyer. Let’s hope my clients never have to test your theory.