Recoup deposit when short sale goes REO

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 2, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I sent a short-sale contract termination notice to the seller's attorney because the home was sold as a sheriff's foreclosure and is now listed as an REO. The listing agent will not return my earnest money deposit unless the seller signs the cancellation rider. But, now the seller has left the country and cannot be contacted anymore! So how can I get my earnest money back? Was there anything that could have been done to prevent this from happening? --Mitch, Illinois

A: Ultimately, the specific instructions in your purchase agreement will control the circumstances under which the earnest money can be released back to you on cancellation of the transaction. Given that the home no longer even belongs to the seller, I can imagine that some brokers would simply give you the deposit back, while others would -- exercising a not-inappropriate abundance of caution -- stick with the letter of the contract.

You might want to ask your agent's broker/manager to contact the broker/manager of the listing agent to see if they would consider exercising their discretion in your situation -- because the seller can no longer legally perform the contract, in any event. Not only is the seller out of the country and out of reach, he doesn't even own the place anymore.

In fact, it might not be a bad strategy -- discuss this with your agent and a local real estate attorney -- to issue a notice to perform that will effectively cancel the contract on those grounds, without requiring the seller's signature.

The listing office may still hold onto the deposit, given the strange factual twists and turns of the situation, until it is ordered by a court to return it. But there is also a chance that the notice to perform and resulting cancellation may bolster the i-dotting, t-crossing paper trail sufficiently to persuade the listing broker that she has the legal right, or obligation, to return it without forcing you to take the matter to court.

If the listing broker refuses (which is certainly within her rights to do), unfortunately, under most real estate sales contracts you'll have to go to court and obtain a court order for the earnest money deposit to be released.

But let's talk hindsight really quickly here. There are many, many events and occurrences that can and often do prevent short sales from closing, including the somewhat predictable circumstance that the bank may foreclose on the property before the short sale closes. As a result, many buyer's brokers/agents suggest their short-sale buyers sign an addendum/clause under which the earnest money deposit will remain uncashed and with the buyer's broker unless and until the seller's bank approves the short sale.

The bank generally won't approve a short sale when the sheriff's foreclosure sale date is looming that near, unless the bank is also willing to postpone the foreclosure to allow the short sale to close. In fact, this clause is a standard line item in most states' short-sale addenda forms.

Depending on how much your deposit was, you may be able to go to small claims court and get a court order for the return of your deposit money fairly quickly and with a relatively small amount of effort and cost. In your state, Illinois, you can bring a small claims lawsuit against the seller for your earnest money deposit, so long as you are seeking $10,000 or less.

Small claims trials are very quick, and you don't need an attorney to bring a case. If the seller has left the country, chances are good that he will simply not respond or show up to the lawsuit.

If you follow the proper procedures for serving the seller with the notification of the case, you may be able to obtain a default judgment against the seller fairly quickly -- along with a court order for your deposit money to be returned.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

                                                   
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