Ask the Brokers – Show Me the Money

Kristn.jpgA reader asks:

If the buyer cancels the contract within 17 days based on an unfavorable inspection report, does the seller have to refund the deposit within 17 days from the date of the cancellation? How would one proceed to get the deposit back?

If using the California Association of Realtors Residential Purchase Agreement, and assuming that the default 17 days for removal of the property inspection contingency is in effect, the buyer may within this timeframe give the Seller a notice of cancellation. However, it is important to keep in mind that the Purchase Agreement is a bilateral contract. In other words, it takes two signatures to get enter into contract and two signatures to get out of it. The contract states that, if written notice is provided, “Buyer and Seller agree to sign mutual instructions to cancel the sale and escrow and release deposits to the party entitled to the funds, less fees and costs incurred by that party.”

The “pickle” occurs when the Seller does not agree to sign a release of funds, and I have seen this happen. Escrow, as an independent third party, can not release the deposit until all parties have signed, so failure to sign by the Seller would delay disbursement. According the the Cancellation of Deposits provision, “Release of funds will require mutual signed release instructions from the Buyer and Seller, judicial decision or arbitration award.” So what is to keep an ornery Seller from releasing a Buyer’s deposit when he is entitled to its return? A couple of things, actually. From a contract standpoint, “a party may be subject to a civil penalty of up to $1,000 for refusal to sign such instructions if no good faith dispute exists as to who is entitled to the deposited funds.” This is the legal hammer. The practical hammer is that a Seller could be unable to close escrow with a subsequent buyer if a previous, open escrow exists. When things get to this point, Sellers usually find it in their best interest to allow return of the Buyer’s deposit if he is entitled.

In a worst case, return of a Buyer’s funds could require legal challenge. From a personal standpoint, I have never been involved in a transaction where the Seller wasn’t anxious to return an unwilling buyer’s deposit (one to which he was contractually entitled) and move on. Afterall, a Seller is trying to “sell”, and delays only hamper that goal. As we often say, in real estate, time is never on your side.

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