Selling House

[JohnGalt]

For those of you who have sold homes in the past - what kind of requirements have you had for the buyer before entering into a contract?

I'm asking because I had an offer over the weekend and spent a decent amount of time negotiating only to have the buyer pull out because they realized they wouldn't have enough for the 3.5% down payment until August because they need a July bonus to come in.  They were pre-approved, but I had no warning that this would be an issue for them until the last minute.  Initially they wanted a late July close date, I'm really glad I didn't enter a contract with them and have the house off the market for most of the summer only to have them not be able to come up with the down payment in the end.  I'm thinking about asking for proof of downpayment funds for any other offers before entering into a contract but am also wondering if there is anything else I should be doing to vet the buyers. 

[Another Reader]

Are you represented by an agent?  That person or you should require a loan approval and proof of funds for the downpayment as part of the offer contract.  In Arizona, there's a form put out by the MLS that is filled out by the lender and is included with the contract by any halfway decent agent.

Unless your buyer pool is mostly FHA buyers, I would advise either not taking FHA contracts or vetting them very carefully.  If they add closing costs to the agreed upon price, the property may not appraise for the stated purchase price.  In addition, FHA appraisers have some inspection duties that are part of the appraisal and will call you on anything that does not meet FHA standards.  You will have to make repairs at your expense to get the deal to close.

I would rather take a little less from a fully qualified 20 percent down conventional buyer than deal with FHA.  There's a greater chance the escrow will actually close.

[DoubleDown]

John,

Sorry to hear your deal fell through, but hopefully there will be other offers around the corner.

My two cents is that a strong earnest deposit -- say, at least 5% of purchase price -- speaks volumes and will prevent flakiness for just about any reason. And if the buyer does fail to follow through for whatever reason, that amount is likely worth your effort to have the deal fall through and start over.

You could always not allow a contingency for the buyer to get their earnest deposit refunded if they fail to obtain financing for any reason, or particularly for not being able to raise a stated down payment (say, 10-20%). Well qualified buyers likely won't mind not having that contingency available. Sure, you might have a slightly smaller pool of potential buyers, but most of those might not be buyers you want to deal with anyhow, as you just experienced. Best of luck.

[Undecided]

John,

Sorry to hear your deal fell through, but hopefully there will be other offers around the corner.

My two cents is that a strong earnest deposit -- say, at least 5% of purchase price -- speaks volumes and will prevent flakiness for just about any reason. And if the buyer does fail to follow through for whatever reason, that amount is likely worth your effort to have the deal fall through and start over.

You could always not allow a contingency for the buyer to get their earnest deposit refunded if they fail to obtain financing for any reason, or particularly for not being able to raise a stated down payment (say, 10-20%). Well qualified buyers likely won't mind not having that contingency available. Sure, you might have a slightly smaller pool of potential buyers, but most of those might not be buyers you want to deal with anyhow, as you just experienced. Best of luck.

I would caution, though, that many markets have their own developed "standards" for things like earnest money, and trying to depart from them may make potential counterparties quite suspicious.

[Another Reader]

In most jurisdictions, there are financing, appraisal and inspection contingencies in the contract.  Usually there are time periods and/or dates for the contingencies to be removed.  If a buyer cancels during the contingency period, the earnest money is returned.

[SnackDog]

In many areas, the earnest money is only returned if the seller agrees to return it. If you as seller have any gripe, legal or not, with the buyer you may elect to negotiate to keep all or a portion of the earnest money. If they balk it could end up in small claims court and the worst outcome is seller does not keep earnest money, more likely seller will keep some.

[DoubleDown]

Recognizing that there are many regional differences in real estate laws and customs, I still advocate for a large earnest deposit and removal of any contingencies which tilt too heavily towards the buyer. I would have no problem removing or modifying a buyer-proposed financing contingency that would otherwise allow them to back out of a deal at no penalty because they didn't have the ability to close the deal. That's the whole point of the earnest deposit -- to get some buyer skin in the game and make the seller whole if the buyer flakes out.

I think it's the same with other kinds of buyer/seller transactions or rental agreements. Sure, you can opt to tilt things heavily towards the consumer and drive up quantity of buyers/tenants, but then quality suffers.... usually better to focus on getting quality buyers at the expense of quantity. Like I said, losing those flaky home buyers is no loss.

I have no problem bucking "customary" practices either; I've insisted on every deal removing the BS "arbitration" clauses used in default realtor sales contracts -- they always howl and say it's customary and required (not true), and I tell them either remove it or the contract won't be signed. Then they remove it.

As an aside, where I live (Virginia), earnest money is held in escrow and can only be returned to the buyer once any disputes have been settled, or as decided by a court.

[kikichewie]

Meh. As a buyer, I'd never put down more than $1,000 earnest money, we always include an inspection contingency, we don't pay closing costs, and we don't feel it is the seller's business whether we make a down payment or not (we don't). I don't think it's worth turning off a potential buyer because another buyer dropped the ball.  That said, if a buyer asked to delay closing, I'd say no and move on. Oh, and as a seller I'd never allow a contingency based on the sale of the buyer's current home.