What would you do?

[Jim S]

Listed a finished project and received 4 contacts on the house in the first 2 days. 3 were FHA and one was conventional financing. I was reluctant to go with any of the FHA due to their appraisals tending to come in low. The 4th offer was a conventional offer for 20% down and they had cash in the bank. My realtor warned me not to accept this offer due to their buyers agent's office was known to be difficult to deal with and game players. I decided to select them anyway due to the conventional financing and heavy down payment.
Closing was set for 45 days on 6/15. Two days before the expected closing we received a request from the buyer’s agent for an extension of 2 weeks due to the buyer not being able to find her W-2. My agent spoke with their mortgage company who stated everything looked great.
Closing was now set for 7/1. On 6/29 we received a call from the buyer’s agent requesting a 21 day extension due to the fact that the title company was moving. Blew me away. Where were they moving? Alaska?
My agent grilled their agent and she assured him that everything was fine and there were no problems with this deal. Gave her personal guaranty that the deal was good.
With our 7/21 closing date approaching fast, my agent called the buyer’s agent today. She admitted that they are having mortgage issues and are now trying to find another lender. There is no chance that they can put together anything in 3 days.
I normally am an easy going guy. I understand people have issues, blah, blah, blah. They have just wasted 11 weeks of my time and holding costs. We even removed all the staging furniture 3 days ago.
The question is….would you keep their $3,000 deposit?

[J Scott]

First, you should absolutely keep the deposit. And, if they ask for another extension, offer them another week or two if they put the entire downpayment (20% of the purchase price) up as additional non-refundable earnest money.

While you didn't ask, here are 10 things you can do differently in the future to prevent this (this was going to be a blog post, but this seemed as good a place as any to post it):

1. Get AS MUCH earnest money as you possibly can. While everyone likes to be optimistic about the deal the day the contract is signed, I can't count the number of times I've looked back a few weeks later and wished I had gotten a lot more earnest money.

2. Have the buyer use a mortgage broker you know and trust, or at very least, ask them to get pre-qualified with a broker you know and trust. Always call the buyer's mortgage broker to chat with them to make sure they are familiar with any flip rules that might be applicable and ask about the buyer's qualifications and what are the broker's biggest concerns about getting the loan done. If it's not a broker you recommended, they probably won't tell you anything worthwhile, but you may be able to pick up something from asking the questions.

3. Keep financing contingency to 21 days at the most. There is no reason it should take longer to get a loan commitment letter for the buyer (regardless if it's FHA, VA or conventional). If the broker balks at the 21 days for financing contingency, make the buyer use another broker -- there is an issue or the broker isn't very good.

4. Keep the closing date to 30 days or less. Unless you live in a state where a 30 day closing is really tough (like New York, I believe), there's no reason it should take longer than that. Good mortgage brokers can get FHA, conventional and VA loans done in three weeks (four weeks tops), and that's even when two appraisals are needed. At VERY MOST, give 5 weeks if there is a good reason.

5. Did the broker order an appraisal relatively quickly? A sure sign that there is going to be an issue is when the broker drags their feet on ordering an appraisal. Buyers don't want to spend money until they're confident they'll close.

6. The DAY the financing contingency was up, you should have requested a loan commitment letter from the broker. No commitment letter, no deal -- unless the buyer is willing to put up more earnest money.

7. As soon as the buyer requests the first extension of the closing, ask the agent and broker how confident they are that the extension will be long enough to get the deal closed. 9 out of 10 times, they'll tell you that they are certain or near-certain the extension will be enough time. Reply with, "If you're certain the extension will be sufficient to get this deal closed, I'll grant the extension if the buyer puts up additional non-refundable earnest money. Since they'll need the money for the downpayment at closing anyway, there's no reason they can't put the money in escrow today, right?" How much extra to ask for is up to you, but anything up to the entire downpayment would seem reasonable, especially if the agent/broker are "certain" it will close. Don't give more than 7 extra days in the first extension.

[By the way, this is the best way to find out if the broker is really "certain" about the deal -- if the buyer refuses to put up more earnest money, you can be pretty sure the deal isn't going to close and the broker already knows it, which is why they won't suggest the buyer put up more money.]

8. If the buyer requests a second extension, do it under the following two conditions (and don't give more than an additional 7 extra days):

8a. The buyer puts up the entire downpayment as non-refundable earnest money (if they haven't already); and

8b. You get a "kickout clause" added to the contract, where you can start marketing the house again, and if you find another buyer you'd like to go with, the current buyer has 48 hours to get a clear to close, or you can go with the new buyer and keep any earnest money.

9. If the buyer requests a third extension, you have two choices:

9a. With the kickout clause, you can pretty much extend as long as you want, as you always have the option to go with another buyer if one comes along. The only drawback is that you don't get the earnest money until you ultimately terminate the contract (though that shouldn't be your goal); or

9b. The other option is to terminate the contract and tell the buyer that if they figure out their financing issue and can get things resolved, you're happy to sign a new contract and apply the earnest money from the original contract, but you'll have a right to renegotiate terms and perhaps ask for additional earnest money for the new contract.

10. Throughout the process, call the mortgage broker (get the seller's written permission to contact the broker as part of the contract) once per week (Tuesday or Thursdays tend to be the best) and get a status on the loan. Ask what has been done, what the next steps are, if there are any issues that have come up, when the broker thinks the loan will go to underwriting, etc. In addition, once the loan is in underwriting, have the broker tell you every time the underwriter comes back with conditions, and what SPECIFICALLY those conditions are. This will keep you updated on exactly how close you are to the closing and what is holding it up.