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Deposit should be big enough to deter 'buyer's remorse'

Benny Kass
Inman News®

DEAR BENNY: Some states such as California have a 3 percent limit to deposit recovery; buyers have the right, if they legally back out of a contract, to secure a full return of up to a 3 percent deposit. Any deposit over 3 percent is not refundable. In California, I have never seen a deposit over 3 percent. --Joe

DEAR JOE: I am not a California attorney, but I did a Web search on the issue of the earnest money deposit when you sign a contract to purchase a house or a condo. I am not sure you are correct. While you are right that most deposits in California do not exceed 3 percent of the purchase price, it's not based on any legal requirement.

Apparently, sellers sign a provision that they will be limited to 3 percent of the purchase price in the event the buyer defaults. Accordingly, the earnest money deposit rarely exceeds that amount.

If I am a seller, I want more than 3 percent should my buyer default. If there is a default, I have to start all over again marketing the house, and in the meantime I have to continue to carry my property -- i.e., upkeep, real estate taxes, mortgage and insurance.

In my practice, when I am representing sellers, I try to get a deposit of no less than 5 percent. I want the buyer to recognize that should he decide not to buy -- i.e., get buyer's remorse -- he stands to lose a lot of money. Of course, if he can't meet certain contingencies, such as an acceptable appraisal or obtaining financing, he gets the deposit back.

And obviously if I am representing buyers, I want the deposit to be as little as possible. Ten dollars is adequate consideration.

DEAR BENNY: In your May 30 column response regarding stepped-down basis of inherited property and/or gifting of same, there are two errors in your answer.

1. With respect to the alternate valuation date allowed for an estate, the available election is available only when the estate has an estate tax liability, and only to the extent of that liability. If there is no estate tax, then no alternate valuation is allowed. Your answer implies otherwise. The date is the date of death.

2. When property is received by gift, the basis to the donee is the basis of the donor, or the fair market value of the property on the date of gift, whichever is lower. Your answer does not mention the fair market value on the date of gift.

I submit this information only for purposes of clarity, certainly not to criticize. --Jim

DEAR JIM: Many thanks for the clarification. This highlights perhaps the main message readers should get from my column: Discuss your legal issues with your attorney and discuss your financial issues and concerns with your financial expert or CPA.

DEAR BENNY: The changes with FHA over the last year have not only made it difficult for condo owners to sell or refinance, but it has also put a potential financial strain on the community as well. If the community meets the new FHA qualifications, the board is faced with the decision of spending the $1,000 to $2,000 to get it approved. Those funds may be difficult to come by in today's economy.

The reason I'm writing you is that I felt you may have oversimplified the amendment process and gave readers the impression that it should be quick and easy to get the rental limitation in place so that the community could work towards FHA approval.

As an owner of a community association management company that works with communities in Virginia, I can personally attest that getting the required 66.67 percent affirmative vote to amend the declaration is anything but easy, especially when you are dealing with an emotional issue like limiting an owner's right to rent his unit. I am personally in favor of rental limits; however, clear and equitable processes must be developed and implemented to manage the rental limitation. It is not an easy task to develop processes that most can agree on.

Even if you are able to educate the community on the importance of limiting rentals, and that ultimately the ability to easily sell your unit should outweigh your ability to rent it, there is the much bigger issue at play: apathy among unit owners. Many communities struggle to just get a quorum to hold an official owners meeting, and actually getting enough votes to approve an amendment can be an impossible task. We've had communities try for more than two years, expending significant money and energy attempting to pass an amendment just to fall short due to a lack of response.

I think education on the process and the understanding of how important it is for the unit owners to be involved is the key to reversing this trend. Thank you for your time and I hope you continue writing articles to educate your readers and encourage participation in their community associations. --John

DEAR JOHN: Many thanks for your very helpful comments. If my earlier column gave the impression that it was easy to amend community association documents, then I apologize.