(From our August 2021 newsletter.)
In the classic 1967 film “The Producers,” Zero Mostel played a corrupt, washed up Broadway producer. He and a partner raised a ton of cash to put out a show that (they thought) was guaranteed to flop “Springtime for Hitler” would be so bad, they figured it would blow up after one night and they’d keep the money.
That story was a bit like this recent real estate adventure of mine.
I listed a nice entry-level home at $425,000. It went Pending quickly. The buyers were well qualified. Their offer exceeded the list price by $12,000, with a $48,000 down payment.
Escrow went smoothly. No problems with title, inspection or appraisal. We were four days away from closing when the buyer’s agent called. His clients wanted to switch financing. They would apply for a government subsidized loan with Down Payment Assistance. If successful, the down payment would shrink from $48,000 to about $8,000. (The Interest rate would be higher.)
It sounded odd. Why the change? The agent said his clients needed to conserve cash. For what? He didn’t know. He muttered something about a death in the family. I asked, do your clients need to conserve $40,000 to pay for a funeral? Again he pleaded ignorance.
They immediately applied for the DPA loan. The application went in just one day ahead of the contract’s Loan Termination deadline. That’s the last day for a buyer to terminate a contract based on dissatisfaction with the loan terms and conditions-- and walk away with a full refund of earnest money. In this case, the earnest money was $7,000.
The buyers’ mortgage broker insisted their client would qualify. They had stellar credit and great employment. I asked, might they be too well qualified? To get Down Payment Assistance, you can’t make too much money. The lender assured me their income fell right into the sweet spot for qualification. Not too much, not too little.
But to make it fly, they’d need an extension of the Loan Termination deadline. Give us one extra day, they pleaded, to look at the new loan. I huddled with the seller. Now why would the buyers request a Loan Termination extension?
Here we must speculate. You may find this a bit cynical.
We believe the buyers had simply changed their mind about the purchase. The new financing application was a ruse. Much like “Springtime for Hitler,” it was meant to fail. When it did, the buyers’ agent would say they were dissatisfied with the loan terms, and walk away.
Of course they’d be dissatisfied—they were denied. Even if approved, they could claim dissatisfaction with some aspect of the new loan such as its higher interest rate.
The Loan Termination provision of a standard Colorado real estate contract is ambiguous at best. It says the contract is "conditional upon Buyer determining, in Buyer’s sole subjective discretion, whether the New Loan is satisfactory to Buyer, including its availability, payments, interest rate, terms, conditions and cost.”
Does that mean a buyer can assert virtually any objection, about a loan that hasn’t changed in any way since first discussed, and freely exit the contract—right up until the deadline?
Some people think so. I believe that is a dangerous posture with a Russian roulette risk of vanquishing the buyer’s earnest money.
We on the seller team emerged from our huddle and refused to extend the deadline. The buyer would not get an extra day to consider new financing. In a phone call, the buyer reps were hopping mad, hurling all sorts of vengeful threats in my direction.
The buyers went ahead and terminated anyway, ahead of the non-extended deadline. We on the seller side then refused to agree to release the earnest money, saying the buyer had no right to terminate.
In earnest money disputes, the Colorado contract directs the parties to try mediation. In that process, a professional mediator listens to the facts and recommends a resolution. It is not binding, and it may be followed by arbitration or litigation.
The sellers had clearly been damaged. We turned away other good offers to accept this one. The property was off market for 28 days. Carrying costs were incurred such as a month of financing with a high-interest hard money loan.
In our case, the buyers might have come out better without all the trickery. Just terminate the original loan. That may or may not have been acceptable in the eyes of a judge or mediator. Instead they unhatched a scheme that looked and smelled a lot like bad faith. That’s a big no-no in the Colorado contract, to which a mediator or judge may not have taken kindly.
In the Producers, "Springtime for Hitler" turned out to be a huge hit. But the crooked executives were convicted of fraud and sent to prison.
We settled out of court, one week after termination, with a 50/50 split of the earnest money. In the end, no one was particularly happy. But so far, no one has gone to prison.