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Going hard on your earnest money – are you sure you’re protecting your client?

I recently had a deal where the Buyer’s 30 day Financial Contingency was up and my Sellers wanted to ask the Buyers to waive their financial contingency.

My initial reaction was, “In this market?” You see, unlike almost every contingency form in our Northwest Multiple Listing Service Library that has a automatic timeline attached that waives said contingencies once the agreed upon timeline is met, the financial contingency in our MLS forms is not an “automatically deemed satisfied” contingency.

So the Buyers must actually give “notice” (that means in writing) they are in fact, agreeing to waive the condition to purchase the home based on their ability to obtain financing.

The Loophole

Of course, the buyer could simply give notice they are waiving their financial contingency (there’s an addendum for that)…but why? In essence, if the buyer does not give notice they are waiving their contingency, then even after the 30 days has come and gone, if the buyer cannot obtain financing and gives written confirmation of such from their lender, they still have the right to their earnest money.

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On top of that, the seller must ask the Buyers to waive their contingency by giving them notice of termination! (You guessed it…there’s an addendum for that as well) So, in order to get the buyer to waive their financial contingency, the seller must threaten termination of the entire agreement to do so! This gives the buyer the right to walk away from the entire deal if they simply do not respond to the sellers request (they have 3 days from delivery of the notice). Oh, and by the way…the Earnest Money is refunded back the Buyer!

The Remedy

So if the buyer refuses to waive their contingency or the seller isn’t quite willing to give notice to terminate in fear the buyer “calls their bluff” isn’t willing to waive their contingency…what’s the seller to do? In most cases, nothing! The financial contingency form is a “leap of faith” form in our library and woefully inadequate to protect the sellers position in the Agreement. But then again, deals close everyday in Washington without the buyers waiving their financial contingency so why bother?

So, Do Your Forms Protect the Seller or the Buyer?

As you can see, the financial contingency form is heavily laden for the buyer in our State. On top of the waiver issue, the buyer is also protected in the event the appraisal comes in below value and can even terminate and be refunded their earnest money if they were unable to obtain a homeowners or property insurance binder. (Yep, there’s an addendum for that too!) So, what would you do for your sellers if you were in my shoes?

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Written By

Patrick Flynn is a 13 year Veteran of this Real Estate fray and a blogger on mySeattleblogs and is active in various social networks. Like many writers at Agent Genius, Patrick wears a few hats other than a Broker's lid- he is also a Certified Real Estate Instructor for the State of Washington and has enjoyed delivering 1,000+ hours of clock hour and non-clock hour approved courses in his career. Patrick has also been a Designated Broker since 2003 and revels in being able to coach and mentor fellow real estate professionals.

11 Comments

11 Comments

  1. Bruce Lemieux

    June 1, 2010 at 12:02 pm

    I deal with this on every one of my listings. Our contracts read the same here in metro D.C. for financial contingencies. They don’t just expire; the seller must give notice to the buyer to remove them, and the entire contract is void if they don’t after 3 days.

    Here’s what I do:

    #1. I send the releases over to the buyer’s agent 1 week before the expiration date telling them that we expect a release by the deadline. This usually gets the following reaction from the buyer’s agent: “Huh?”. From there, I do my best to encourage/pressure them to send the release. This works ~50% of the time. If not:

    #2. Get a letter from the buyer’s mortgage saying that everything is approved. At this point, it’s usually conditional only on getting a clear best inspection and proof of insurance. If a solid buyer has financing but won’t sign the release, then I don’t push for it.

    #3. If I can’t get the letter and it looks like the loan is dragging along, then I continue to work with/push the agent and the bank to understand *why* it’s not done. If there’s a high enough level of concern, then we may well take the slash-and-burn option of sending over the notice. We weigh up the risk and then the seller has to make the call.

    At the end of the day, if you have a buyer who wants to buy, and a seller who wants to sell, then the deal will close with or without these releases.

  2. Denise Hamlin

    June 1, 2010 at 8:59 pm

    I guess we’re more fortunate here in Iowa. The financing contingency needs to be released by the buyers on a date specified in the purchase agreement. (Usually 30 days).

    Bruce gave you a couple of ideas about how he deals with your convoluted way of doing things. Really glad I’m not in your shoes. Seems like a lot of extra work to me!

  3. Patrick

    June 2, 2010 at 11:03 am

    Thanks Bruce and Denise for your comments…fun stuff this financing!!

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