Thanks to the prevalence of bank owned homes in the Phoenix real estate market, the rules are getting rewritten on a daily basis. And nearly all of these rewrites are to the detriment of the consumer.
Take the case of the hijacked earnest deposit, which I’d written about previously here.
The short version is my buyer at the beginning of august cancelled a purchase contract on a bank-owned home in accordance to the terms of the contract and requested the earnest deposit be returned to him.
This should have been cut and dried but it wasn’t. The asset manager working on behalf of the bank decided to contest the earnest deposit based on the bank’s addendum to the contract. Here was the paragraph in question:
6. Mortgage Contingency. Purchaser’s obligation to purchase the Property under the Agreement (check one): (_X_) IS (___) IS NOT contingent on Purchaser obtaining financing for the purchase of the Property. In the event this contract is subject to the Purchaser obtaining a mortgage then the Purchaser shall obtain a firm written commitment on or before June 27, 2011.
If said firm commitment is not obtained by said date, this Contract shall be null and void and neither party shall have any further rights or obligations or liabilities to the other by reason of this contract, except that the earnest money shall be promptly refunded, provided however that the purchaser has made a mortgage application within three (3) days of the receipt of a fully executed contract, has acted in good faith and has otherwise complied with the terms and conditions of the contract. Notwithstanding the foregoing, the seller, in writing only, at its sole and absolute discretion, which may be arbitrary, may extend the date for obtaining a firm written commitment. Purchasers agrees that the party holding escrow monies will release said funds once provided with a declination letter by from purchaser’s lender, without any further action or consent from purchaser.
It’s the second paragraph that really is the issue as it both declares the contract null and void if a firm mortgage commitment isn’t given by a certain date in one sentence with the earnest deposit going to the buyer and also says the seller gets the earnest deposit if the buyer is declined for a loan.
Symantically, the sentence dances on the head of a pin. If the buyer doesn’t have a firm mortgage commitment by the lender but hasn’t been declined for the loan by the date set, the earnest deposit goes to the buyer. Otherwise it goes to the seller.
In this instance, the buyer didn’t have a firm mortgage commitment from the lender which would have rendered the contract null and void. The contract would still be alive if the seller had provided an extension in writing; none was given in this case, though all parties were continuing on as if it had happened.
Here’s where the contract gets fun … all’s well unless things aren’t. The seller had no interest in declaring the contract null and void. The seller also neglected to pay attention to its own addendum and boxed itself into a corner because of that neglect.
Enter the folks at Commerce Title, the hand-selected escrow company of the seller and the asset manager.
The purchase contract is incredibly clear on the role of the title company in the event of a dispute. In signing the contract, both buyer and seller authorize the escrow company to determine at its sole and absolute discretion who receives the earnest deposit.
On August 3, the area vice president for Commerce Title did just that, ruling that the seller had no valid claim and that the earnest deposit was to be returned to the buyer.
Except the money wasn’t returned. The legal eagles for Commerce Title, based in Arizona and apparently ignorant of Arizona law and the purchase contract, decided that the escrow company had no authority to decide the issue even though both sides had granted the escrow company that power.
Commerce Title’s new position was that it was only an instruction taker, an allegedly neutral third party, and it was up to the buyer and seller to figure out who gets the earnest deposit.
It was a ludicrous position. Both sides already had claimed the earnest deposit. Under what possibly logic would it be expected that one side or the other would change their mind?
The purchase contract is meant to protect both parties and provide guidelines for the transactions. The escrow company is meant to protect both sides by being the neutral arbiter of the earnest deposit in the event of a dispute. It is supposed to protect one side from unreasonable and/or invalid claims from the other.
Commerce Title failed to do so.
Under the logic used by Commerce, the seller could have claimed the earnest deposit because it was cloudy outside and, since the instructions were in writing, the claim would then become valid regardless of the terms and conditions of the contract.
Commerce Title’s legal department essentially determined that unilateral cancellations are not possible in an Arizona real estate transaction, even though the legally binding executed contract provides the buyer a handful of opportunity for unilateral cancellation.
In acting as an alleged “neutral third party,” attorneys in California working for an escrow company that is a subsidiary of Auction.com reinterpreted the real estate contract to the detriment of the buyer, the consumer.
Sadly, this isn’t an uncommon occurrence.
Which begs the question, if the purpose of the Attorney General and the Arizona Department of Financial Institutions are here to enforce regulations in theory for the protection of the public, where are they when these things are happening?
In this instance, the listing agent also saw the invalidity of his client’s claim and was able to get the asset manager to sign off on a mutual cancellation. My client should receive his earnest deposit today, some 32 days after the contract was cancelled.
If he hadn’t, the buyer’s only option would have been small claims court or other legal recourse, which would have been lengthy and expensive, even if at the end the seller would certainly have lost and then been responsible for the attorney’s fees.
But the onus should never have been on the buyer. Responsibility rested with Commerce Title, the escrow company selected by the seller without input from the buyer. And the company failed in this responsibility to be a truly neutral third party.
Editor’s note: It’s been suggested that real estate agents are a dime a dozen. After spending a month battling the escrow company and its legal department, and having this company threaten to file a complaint about me with the Arizona Department of Real Estate because I dared to suggest I might contact DFI if the escrow company continued to ignore its responsibility, and doing all of this for zero compensation since the transaction didn’t go through … I think not all of us are cut from the same cloth.