Searchlight Crusade

There are all sorts of reasons why escrow falls through, but they fall into three main categories. They can best be described as failures of qualification, failures of the property itself, and failures of execution.

Before I get into the main subject matter of the article, I need to define a contingency period. This is a period built into the beginning of the escrow process when one party or the other can walk away without consequences or penalty, usually for a specific reason. For instance, the default on the standard forms here in California is that all offers to purchase are contingent upon the loan for seventeen calendar days after acceptance. If the loan is turned down on the sixteenth day and the buyer notifies the seller that they want out immediately, the seller should allow the deposit to be returned by escrow. If it happened on the nineteenth day, the buyer should be aware that their deposit is likely forfeit. A contingency, just like anything else, is something negotiated as part of the purchase contract. If it’s in the contract, you have one. If it’s not, you don’t, although some states may give buyers certain contingency rights as a matter of law.

Failure to qualify means that something goes astray with the buyer’s quest to acquire necessary financing. They cannot qualify for the loan, they do not qualify within the escrow period under the contract, they allow their loan officer to spin all kinds of fairy tales about what the market is doing or likely to be doing when the plain fact of the matter is that the loan officer just can’t do the loan on the terms they indicated when the poor unsuspecting consumer signed up. Maybe it existed at one time, or maybe they just hoped it would. In any case, it wasn’t locked in and it certainly doesn’t exist now, so rather than pay the difference out of their commission, the loan officer delays and hopes for the market or a miracle to save them. Or they told the consumer about a loan they thought they might be able to qualify them for, only to find out they don’t, and they’re stalling, hoping a better alternative will open up. Fact is, that if a loan officer can’t get the loan done in thirty days, I’ll bet money they can’t do it on the terms stated in the initial documents. Jokers like this are a large part of the reason you should have a back up loan if you can find someone willing. Chances are much better that both loans will be ready to go with a lot fewer games played.

Sometimes it does happen that consumers don’t qualify for the loans due to real problems that just don’t come up until the file is in underwriting. Since this can cause you to lose your deposit, it’s a good idea to ask your loan officer about any potential problems before you make an offer. You know your personal financial situation but you probably don’t know what all of the potential disqualifying issues for a lender. The loan officer should know what the issues are that may cause lenders to have difficulty approving your loan, but they don’t know your history unless you tell them. Many things that underwriting will catch do not necessarily show up on a loan application or credit report, so if you have an unpaid collection, monthly expenses that might not show up, a lien, a dispute in progress, any issues with your source of income, or anything else in your background that you have any questions about whether it could impact your loan, it’s a good idea to ask right upfront, before you get into the process. Sometimes these issues mean that you flat out do not qualify, sometimes they mean that instead of 100 percent financing, you only qualify for 70 percent. Unless you have that extra 30 percent of the purchase price lying around somewhere, the transaction isn’t going to fly, and the sooner you find out, the better. A loan officer who can’t show you a loan commitment with conditions you can meet before the end of the contingency period is not your friend.

The second category of reasons escrow fails are failures of the property. Some defect is disclosed by the inspection process that the owner does not want to correct or is unable to correct, and the buyer decides that the property is not for them under the circumstances. Mold, termite damage, seepage, damage to the foundation, and all of the other usual suspects fall into this category. Title issues are here also, although they usually become unsolvable when they impact the loan. If the seller can’t deliver clear title, the title company won’t insure it, the lender won’t lend the money, and any rational buyer should want to walk away. Why do you want to give someone money when they are likely not legally entitled to sell you the property?

For defects, both structural and title, providing it was discovered within the contingency period, it’s up to the seller to convince the buyer they should still be interested. After the contingency period is over, things are more complicated as there is the possible forfeiture of the deposit to weigh. Good agents that you want to recommend to your friends get out and get the inspections done right away to avoid this issue. Agents that are looking to line their own pocket wait until the contingency period is over before doing so, as this gives the buyer more incentive to stay in the transaction. Let’s say you’ve got a $5000 deposit on the line and seventeen days to remove contingencies, as is the default here in California. Would you rather your agent got an inspector out within a couple of days, or waited three weeks? Keep in mind that you’re going to pay the inspector, but that’s money you’re going to spend regardless. The first possibility means that you find out about potential defects while you can still recover your deposit, while the second possibility means the seller can likely keep that deposit. I know which situation I’d rather be in.

Failures of execution are likely to be because someone messed up. The seller didn’t do this. The buyer didn’t do that. One agent or the other dropped the ball. The escrow officer didn’t do their job. Loan officer failures would be here if loans weren’t a whole category on their own. This category covers all the little details in the purchase contract, each of which has to be met before the escrow officer can close the transaction. These failures may or may not be actionable, in the sense of you being able to hold them responsible for their failure. Many times, the escrow officer is used as a whipping post for the failures of other parties, but some escrow officers do screw up big time. Sometimes it takes an outside expert to dissect things dispassionately in order to figure out what went wrong where and whose fault it was, but outside experts cost money, so most of the time everybody just fades into the sunset pointing fingers at each other, unless there’s some pretty significant cash involved. The transaction is dead and it’s not coming back. Unless there’s a good possibility of recovering enough money to make it worthwhile, let it go.

Caveat Emptor

I realized that I hadn’t covered timeshares, and decided it was time.

I suppose I should define what a timeshare is, just in case. A timeshare is a property where you buy the rights to use it for a certain amount of time every year. The most typical time share is a two week period.

Timeshares are attractive to developers because they can get more money for building the same property. You might have a high-rise full of condos where the market price might be $200,000 each. But they can sell each of twenty-six timeshares for maybe $20,000 each. Because it’s not such a big bite, their potential market is far wider, and they can sell to way more people. People are willing to pay more for vacation lodging than regular housing.

Developers also make money off of the financing, and off of the monthly dues for management expenses, which are analogous to association dues in a condominium association, paid to keep the complex maintenance up (and usually maid service, etcetera). Furthermore, since very few lenders want to finance timeshares, the interest rate can be (and usually is) outrageous, not to mention that you should be prepared for severe interest rate sticker shock if you’re financing one somewhere outside the United States. The developer can gouge because most lenders won’t touch timeshares, and it’s not like the buyers are going to do any better elsewhere. Title insurance companies don’t like timeshares either.

Developers love to tell potential buyers that timeshares are an investment, because they are real estate. The fact is that timeshares are like cars – there’s a large initial hit on value, the instant the transaction is final. Nor do they tend to recover. There are at least two websites that specialize in helping you sell your timeshare, because most people figure out within a year or two that they’ve been taken. I don’t deal with them any more than I can avoid, but I have never even heard of someone recovering their investment in a timeshare (except the developer).

Sometimes the time you buy is always the same two weeks in the same unit, but this can very. Quite a few have a yearly drawing among owners of a given unit for the most desirable time frames, and a few even put all units and all owners into the pool. Read the individual sales contract carefully for how this is accomplished. If you have or draw a time that’s unusable to you, most of the same places that will help you sell the timeshare in its entirety will also help you sell or trade your time slot for the year. Nor do folks generally get back their annual cost of the unit by selling their time slot, but it can be a good way to buy a vacation time slot cheap if you are prudent and plan ahead.

Furthermore, of course the timeshare is always in the same place. This is great if you want to return to Honolulu every single year, but not so great if you want to go a different place every year. Many developers tout swap programs, often to swap your slot in such desirable locales as Ultima Thule for one in Tahiti. Not likely to happen, or if it does, likely to require a good deal of cash outlay in the direction of the people who bought in Tahiti.

Additional issues are that maintenance can be problematical. Since no single owner is responsible for the complete upkeep of any given unit, let alone the entire complex, the management is often lax about repairs and preventative maintenance. After all, if they put that new roof off for a year they can just pocket the money. Where even condominium owners have to deal with any problems pretty much every day, timeshare owners are there for a couple of weeks per year.

All of this is not to say that there are no happy timeshare owners. If you are going to go to Las Vegas for two weeks every year and your schedule is flexible enough that you can go no matter what time slot you end up with, more power to you, and a timeshare might be the way to go. If you need to go during the summer months because that’s when the kids are out of school, or if you don’t necessarily want to go there every year, not so much. I’ve never owned one myself, but I understand some nasty fights break out among co-owners for time slots, as well. Most people think the idea of a timeshare in Phoenix is to go there in the winter and play golf while the rest of the country is freezing, not go from perfectly acceptable weather elsewhere on July 4th to a modern day version of the La Brea Tar Pits because the temperature is 125 degrees Fahrenheit where the asphalt melts and people sink in and get trapped.

Caveat Emptor

I keep getting search result hits for the string “fsbo horror.” It’s an amalgamation because I haven’t done any postings on this specific subject.

Both buyers and sellers have problems relating to For Sale By Owner issues.

For sellers, the largest issue seems to be properly disclosing all relevant items to satisfy the liability issue. There are resources available, but the question is whether the you took proper advantage of them and made all the legally required disclosures on any issue with the property there may be. If you have an agent that fails to do this, you can sue them. If you are doing it yourself, the only one responsible is you. You are claiming to be capable of doing just as good a job as the professional, and if you didn’t do it right, the buyer is going to come after you.

Now I’m going to leave the marketing and pricing questions out of the equation, because with a For Sale By Owner most folks should understand that in return for not paying a professional to help you, you’ve got to do it yourself. What many For Sale By Owner folks seem to fail to understand, however, is that if you haven’t met legal requirements, the real nightmare may be just beginning when the property sells.

Let’s say it was something fairly innocuous, like seeping water from a slow leak you didn’t know about. A couple years pass, and now there’s mold or settling. Perhaps the foundation cracks as a result of settling. Bills are thousands to hundreds of thousands of dollars. Your buyer goes back and finds that your water usage went up by fifteen percent in the six months before the sale. He sues, saying that even though you didn’t know, you should have known based upon this evidence. Court cases are decided based upon evidence like this every day. A good lawyer paints you as maliciously selling the property as a result of this. Liability: Steep, to say the least.

Now, let’s look at it from a buyer’s prospective. You have a choice of two identical properties. In one, a seller is acting for themselves, in the other, they have an agent. The price may be a little cheaper on the for sale by owner one, or it may not. One of the reasons people do for sale by owner is they are greedy. But when I’m looking at a for sale by owner, the question that crosses my mind is “Are they rationally greedy, or are they just greedy?” Are they going to disclose everything wrong or that may be an issue with the property? At least here in California, the agent has pretty strong motivation to disclose if something is wrong that they know about. If they don’t, they can lose their license, and even if they don’t, they have potentially unlimited personal liability. If they did disclose, they’re probably off the hook, and even if they aren’t, their insurance will pay for the lawyers, the courts, and any liability. If there’s one thing all long term agents get religion about, no matter their denomination, it’s asking all of the disclosure questions.

This is not the case for many owners selling their own property. Some are every bit as good and conscientious as any agent. A good proportion, however, are intentionally concealing something about the property. What’s going to happen when it comes to light? If there’s an agent, there’s a license number, a brokerage who was responsible for them, and insurance. The latter two are deep pockets targets for your suit, and you can find them. Once that owner gets the check, you can find them unless they’re dead, but they may not have any money. Even if they do have money, it may be locked up and inaccessible via Homestead or any number of other potential reasons.

One of the reasons that I, as a buyer’s agent, am always leery of a for sale by owner property is that I have to figure that first off, there’s a larger than normal chance that this property has something wrong that’s not properly disclosed. When that happens, my client is going to be unhappy. When my client is unhappy, they are going to sue. The first target is the seller, but if they’re gone or broke, who does my erstwhile client come after? Me. So I have to figure that not only is there a larger chance of there being something wrong, I have to figure there is a larger chance of me being held responsible for something I took every step I legally could to avoid. For Sale By Owner properties usually have to be priced significantly under the market in order to persuade me that not only am I doing the right thing by my clients in trying to sell them this property, where my clients have to pay my buyer’s agent fee out of their pockets rather than out of the selling agent’s commission, but also that the heightened risk of future problems is worth more than the price differential to my clients. Unless the answer is a strong solid “yes” that I can document in court if I have to, I’m going to pass it by in favor of the agent-listed property next door or down the street.

Caveat Emptor (and Vendor)

One of the most important things for the buyer in any transaction is confidence that the seller has disclosed all known problems. One of the things most people don’t realize, or act like they don’t realize, is that it’s at least as important to the seller.


The California Association of Realtors (CAR) has a program called Winforms that lets me ask all of the little niggling questions about the home. Very convenient, very nice, and I’ve done my duty when I fill it out with a listing client.

This does not mean that I or the seller can ignore any metaphorical elephant in the room not covered by the form. If there’s something that’s obvious, I have a duty to ask about it and record the answer, even if it isn’t on the form. The seller has a legal duty to disclose anything they are aware of that might cause a reasonable buyer to change their minds or their offering price. A cracked light switch protector plate is not a big problem and you’re going to either fix it or agree with the seller that you won’t. But past termite damage, whether someone has died in the home recently, soil subsidence (even on the far side of the property), and any number of other factors can be reasons why prudent buyers may no longer be interested, or may wish to re-evaluate their offer. The rule for smart people is “disclose everything and let the buyer decide if it’s important.” A certain percentage of sellers, however, just want to get through the transaction without the buyer changing their mind. For Sale By Owner (FSBO) sellers seem to be significantly worse about it, by the way, which is one of several major reasons I’m always leery of FSBO properties with my buyer clients. These sellers either don’t realize how strongly omissions can come back to bite them, or are hoping they will be gone by the time it comes to light.

First off, unless you’re planning on dying, you can be found. I know a lawyer that makes a good living at it. Furthermore, failure to disclose frequently makes your liability worse, in that you had a duty to disclose and you did not. It is possible that failure to disclose means a judgment for punitive damages in addition to increased economic damages is in your future, whether you are seller or agent or even buyer’s agent if it was bad enough. Furthermore, you can count on the damages being larger because the problem has had time to get worse, paying the costs incurred in order to find you, and so on, when if you had simply disclosed in the first place you would have been off the hook.

Now, your real estate agent is not (generally) a building inspector, tax records expert, or any of those kinds of specialist. I recommend an inspector for every purchase, because I’m certainly not qualified to do that job. But if I spot something that may not be right, I have a duty to disclose it to my principal, and find out if it really means anything from a real expert. Sometimes there’s a tax assessment that has passed or pending that doesn’t have numbers associated with it yet. If it’s passed, the title report should have the information, but they’ve been known to miss one occasionally. If it’s pending (e.g. bond measure on the next ballot), it’s a good idea to tell the buyer, or at least tell the buyer about where to find out.

For an agent, failure to disclose may mean that your professional insurance won’t cover it. The professional insurance is for errors (honest mistakes) and omissions (errors of ignorance), not intentionally hiding something. This liability can easily run to several times any commission you made, so it’s a really bad idea to hide anything. Agent or seller, if they buyer can prove you knew, or that you should have known, you’re basically up the creek.

Caveat Emptor (and Vendor)