Bank wants me to forfeit my 10K in earnest money after inspection; does that sound right to you?

[Leticia L.]

Hi,

I'm in the middle of purchasing a cash only REO. We have offered to pay 10K in eanest money, have show proof that we can pay for the property in cash, and have asked for a longer closer date than normal (45 days) because it will take time for us to get our money out of the various investments we have it in.

The bank has agreed to our last counteroffer on the purchase price but now they want me to sign a form stipulating that we have to agree to forfeit our 10K in earnest money if we walk away at any point after I sign off on the inspection (i.e. like if we can't come up with the cash for some strange reason).

The bank informs us that this is there way to feel more secure--given my 45 day waiting period---that I'll pay for the property by the specified closing date.

On my end, however, it just sounds too risky. I DO have every intention of buying the house -- but what if we discover a major problem with the house just before closing or what if the bank makes demands of us after they accept our offer (can they do that?) that we deem unreasonable? It just seems to risky to guarantee that they'll get to keep our 10K no matter what.

So am I crazy here? Since this is the first time I have ever bought a property, I need your advice. My questions are:

1) Is it typical for banks to ask buyers to sign such a form in these type of sales? And if I sign the form, what are the risks involved?

2) If I decide to move foward, what can I ask for or stipulate in our counteroffer to the bank to make sure that my rights (and my money) are protected?

Any and all advice you can offer would be much appreciated. I feel like I'm swimming up a creek without a paddle and could despertly use the advice from others who are more familiar with these type of sales.

Thanks!

[Jon Holdman]

This is standard practice, not just from the bank but from any seller. You're paying cash so there is no financing contingency. You have an inspection contingency, but that has a deadline. With banks, this deadline is often fairly quick. On my last deal I found out Thursday night my offer was accepted and I had a Monday inspection deadline.

Once all the contingencies are satisified, and for you that sounds like at the point where the inspection deadline passes, the earnest money is committed to the deal. You can still walk, but they keep the money. Nothing unusual here. That's the seller's recourse for having the property off the market if you get cold feet at the last minute.

Do be sure your contract says "liquidated damages" as the remedy if you default, and not "specific performance". Liquidated damages means they keep your earnest money, and that's the end of the deal. Specific performance give them the right to keep the EM AND to sue you for additional damages.