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

Question

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 · Answer

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.

Jon Holdman · Answer

Ah, good point, Jeff. Leticia, one form of real estate business is wholesaling. You find a property, contract on it, then sell it to someone else at the same time. The bank thinks you're a wholesaler. You want to tie up the property, then spend the next 45 days trying to find a buyer. They think you will back out of the deal if you don't, and want to be sure you lose your EM if you try to back out. Nothing you say's going to convince them differently. As I said in the PM, once you have a contract, the bank cannot change anything substantive. If the house burns to the ground, they also cannot force you to buy the burned ruins at the same price.

J Scott · Answer

Keep in mind that the bank has to uphold their side of the contract too... In the case above, the bank was not able to close by the agreed upon date. As soon as the agreed upon closing date passes, the bank is required to get an addendum signed by all parties that says, "We all agree to extend the closing date by a certain period of time." If you choose not to sign this extension, the contract is void and you can get your EM back. You won't lose your EM if the bank can't follow through on their end of the deal. As an example, I had a property under contract from March of this year until September, and signed 7 extensions during that time (because the bank couldn't get clear title to sell the property). During any of these extensions I could have just said, "Never mind...just give me my EM back," and they would have had to do that. So, unless the contract says otherwise, you are guaranteed that the bank will either close by the agreed upon date, or you'll be entitled to your EM back if you want it. NOTE: There may be something in the contract that allows one or both parties a grace period after the closing date in the contract to get things done, but this is generally no more than 7 days. So, the bank may be able to extend the closing 7 days without you signing anything...just a detail to be aware of.

Leticia L. · Answer

It was indeed. We went ahead and signed the papers. The house is now "pending inspection". Thanks again!

Jon Holdman · Answer

Congratulations on the purchase. Enjoy your new house.

Jeff Warner · Answer

Well said Jon. Your explanation of my thoughts is very thorough and easier for a retail buyer to understand. Jeff

Jeff Warner · Answer

Are you sure they're not trying to negotiate a Short Sale from the bank? Short Sales, when listed with a Realtor will sit for ever while the realtor takes offer after offer to present to the bank. Either way I think your in a different situation. You need to do your due diligence, have a solid inspection and be sure that you make your yes or no decision before the inspection period ends. The bank is probably thinking your trying to buy time to flip it and they don't want you to walk if you don't find a buyer in time. Just my opinion. Jeff

Leticia L. · Answer

For more clarification, here is what a friend wrote to me that causes me some concern (i.e. could the same thing happen to me): "One of my best friends has been waiting on a bank-owned property for months now! They fell in love with it mid-summer, had an offer accepted, and now they are just waiting and waiting and waiting, with the bank constantly coming back to them to change the offer details. They're close to walking away because of how frustrating the process is (and there's no end in sight, while the house sits empty and untouched). If they had signed what this bank is asking you to sign, they might have lost their earnest $$."

Leticia L. · Answer

Thanks Jon -- that helps. One other question though. Can the bank make any additional demands or requests once all parties agree to the offer? My concern is that the bank may change the rules on us, making it all-but-impossible to complete the sale.