On Monday we heard from a Buyer's Agent that his Buyer was cancelling the contract based on an "Unfulfilled Loan Contingency". This happens from time to time - but it's always important to carefully review the loan denial from the lender - and to dig deeper if it appears the original "pre-approval" should never have been issued.
Based on further discussion with the lender and the explanation they provided for the loan denial, I drafted the following letter to the Title & Escrow company for my Seller's signature:
In reference to the previous correspondence regarding the LSR and subsequent loan denial, I draw your attention to the following statement made by the Buyer's Lender.
"In addition, we were using $600 a month income from rent received by the applicant's mother and we needed to document that this rent had been received in the past. After it appeared unlikely that we would receive this documentation, we sent out our declination letter."
In plain English this means the Buyer made statements to the Lender regarding their income that they were unable to prove, essentially obtaining the LSR under false pretences. Had the Lender been provided with accurate information by the Buyer initially, the LSR would not have been forthcoming, would not have been available to submit with a purchase offer, and we would not have entered into contract. The result of this "invalid" LSR was to take my property off the market, and therefore incurring additional expenses for continuing to carry the property while waiting for close of escrow.
Given that all parties to the contract are required to act in good faith, and given the fact that the LSR was not obtained in good faith as the Buyer was unable or unwilling to substantiate the statements made to the lender at the time the Buyer obtained the LSR, I ask that you immediately release the earnest money to me (Seller) as liquidated damages, thereby releasing both parties from this contract. Failing that, I ask that you continue to hold the earnest money while I explore the various litigation options open to me.
The Buyer of course wanted the entire amount refunded to them - however - Title & Escrow wisely chose the following path:
I followed up with a call to the Buyer's Agent encouraging him to have his Buyer put a proposal in writing for me 
to present to the Seller. I mentioned that the Seller is extremely busy, and would likely choose to drop this matter in the lap of the District Attorney's office for investigation as to whether there had been an attempt at mortgage fraud - unfortunately all too common these days.
Within hours we had a proposal from the Buyer in writing which the Seller accepted, resulting in the following Supplemental Escrow Instruction:
Seller and Buyer agree and instruct Escrow Agent that the Earnest Money Deposit is to be disbursed 50% to the Seller and 50% to the Buyer.
Both Buyer and Seller signed the instruction and the deed was done.
What lessons do we learn from this?
If you are a Buyer - don't fib to your lender! It can cost you not only the deal, but some - if not all - of your Earnest Money - and you put yourself in position for possible criminal charges!
If you are a Buyer's Agent - do everything you can to make sure the Lender documentation is based on fact - not fiction.
If you are a Listing Agent - if you receive a cancellation due to an "Unfulfilled Loan Contingency" - protect your Seller by doing the "due diligence" to find out if the situation is valid - or a result of "fibbing".
If you are a Seller - make sure you work with a Listing Broker who includes this level of commitment to their client in the service they provide to you. Absent the extra digging around in this case - the Seller would have Zero of the Earnest Money - it would all have been returned to the Buyer.
The best news for the Seller followed the next day - with the property going back under contract!
If you are considering selling a home or real estate in the Phoenix area you owe it to yourself to talk with The Marriott Group at Keller Williams Realty Professional Partners to determine whether Tony Marriott is the best real estate Broker in Phoenix area to help you with the sale of your home.
http://www.phoenixarizonahomesearch.com/
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Fortunately - that was the first time we have run into this with one of our transactions. Buyer beware - tell the truth - or pay the piper!
Interesting story Tony. I had a situation with a client who decided they didn't like the final amount of the payment (not one of the contingencies) and decided to back out of the contract. The lender typed up a letter stating they did not "qualify", although all previous contact between parties indicated that they did. To my knowledge, qualifying was never the issue. The lender used this "letter" so the client would get their EM back, regardless of the client's committment to the contract. Is this an accepted practice? Needless to say, I don't use this lender and will not refer any business to her: )
As a Lender...I have been thrown under the bus on a few occasions. I lose credibility along with my partners when that happens...which is why I don't give out letters until I have proven and verified income, assets and employment...it's better business that way don't you think?
You have to keep on top of the lenders when you are either the buyers or sellers agent. There are so many lender how do a lot of stupid things.
Suzanne - The first - and hopefully the last - but in this climate we'll be watching closely!
Kelli - Sounds like the lender fibbed in that case....
Brad - I applaud you for taking that stance. If only it were true for all lenders.
Jason - In Arizona there is no licensing requirement for Loan Officers - which I think leaves the door open to all sorts of issues. How do you "pre-qual" a lender?
Rich - Thanks for the comment. I did send this over to Brian as well...
Tony,
I did not realize that buyers would actually lie to a lender to get a loan. WOW! what a revelation (I shall have to keep my eyes more open.
Anyway, great due diligence in protecting your buyer.
Good Job Tony! My pet peeve is when a buyer states that I do not have permission to contact his lender in the contract. WEAK! A serious buyer will give explicit permission for an agent to do so! I also love to put in the counter "complete loan approval and appraisal will be completed within due diligence period." That way there is NO doubt where the EMD goes to!
Thanks for your blog....it's a good wake up call/reminder for sure.
Patricia Aulson/Seacoast NH & ME :& MA
Renee - Here in Arizona the "Loan Status Report" - which MUST accompany a Purchase Offer - specifically authorizes the Seller to contact the Buyer's Lender - we use another form "Loan Status Update" for that purpose. We did include the following in one of the counters on this transaction:
Buyer and Seller agree that Earnest Money shall be non-refundable to Buyer after successful completion of the Inspection and Request for Repairs process, except in case of breach by Seller
however, the Buyer countered that out - but raised their offer - so the Seller accepted.
Patricia - Thanks for the comment. It seemed like a "case study" worth sharing!
Tony - what an 'interesting' prisoner photo :D
Christina - It's amazing what you can find on "Free Google Clip Art"! :-)
Tony:
I'm so glad you posted this. It represents how we, as lenders, either gloss over the pre-approval or get stung by a buyer.
The loan declination is what hung the buyer; they either (a) committed loan fraud or (b) weren't getting cooperation from the person who needed to provide documentation.
I have an add-on for you, Tony"
If you are a lender:
Call for help immediately! Ask the borrower's Realtor why you aren't getting loan documentation in a timely manner. Ask the Realtor to intercede when appropriate. Sometimes, borrower's will "fib" to get the loan (which we hate). When you are in concert with a Realtor, you can cut through the muck and get the truth as quickly as possible.
My take on this is that the buyer didn't understand that his statements on the loan application would be verified. Does the mother pay $600 rent? I'm sure she does...in CASH. The lender might have done a better job explaining this to the borrower. Still, lenders have to assume buyers are telling the truth on a loan application.
Brian - Thanks for the additional insight! I suspect the same as you do re: the cash rent payments.
I love your way with words - great article and so right on it is scary - but most of all I love your jail bird.. whoo hooo he is a hottie....lol
Thesa - It seems the jailbird fan club is growing! Thanks for stopping by.
Way to go Tony. Your sellers are lucky to have you looking out for them. I bet the buyers and their agent were shocked at your response to their denial letter. Oh well lesson learned. I'm still smiling about this one!!!
I suppose their intentions were shown not to be malicious when they didn't slink away and let the seller have all of the earnest money. It is probably still a few weeks until the rent is paid again.
Bryant - Thanks for the comment. Yes, the Buyer's Agent kept insisting that his client had acted in good faith - but was at a loss for words when I asked him to explain how providing false information to get a loan approval could be described as "good faith" behavior.
Kelly - In the Arizona contract - if the Seller doesn't contest the earnest money, it would automatically be disbursed to the Buyer. Once the Buyer realized that the Escrow agent wasn't buying their story, they decided to "offer" the 50/50 split that I had suggested to them.... :-)
That is a great solution. You would have had to go to court otherwise if the two sides could not agree. That is a wonderful lesson to the buyer also.
Randy - Right on target - the Buyer now knows "the price of fibbing"....
Tony-As Suzanne mentioned, fortunately this is not something which we deal with often! It can be very frustrating as the Transaction Manager or back office support-when all the work and time is put in to ensure a smooth transaction for everyone involved, only to find out a week before closing that we've received a Loan Denial letter because the buyer "fibbed"....or the lender did not verify information prior to issuing the LSR. Oh, and you can add one more to your jail bird picture fan club! Nice choice of clip art!
Nicole - You can say that again! The first part I mean....not the jail bird part! :-)
Tony, This was such an interesting post. I like reading your posts but have not responded before. I have been learning a lot from you and am glad for you and others like you on AR. You had me interested with the title and then snagged me good with the jail bird guy. Where are you hiding him?
Yvonne - Thanks for the comment and for "surfacing"! The jail bird guy is getting ready to start his own fan blogsite - stay tuned!
Oh boy, I can't wait! This ought to be good!
I think it's animated! :-)
Oh, now you've gone and done it. How will I ever get any sleep waiting on the animated jail bird guy?
That was the plan - you won't! By the way - do you know of anyone planning to buy or sell residential real estate in the Phoenix Metro area? :-)
Oh great. Now you have me trying to think of someone wanting to buy or sell too. :) How much stress can one gal take? Really, my hubby has a job in which he meets people down there a lot. I'll ask him if he has heard of anyone wanting to buy or sell. Of course if he finds someone you will have to let them know about this wacky woman who loves to travel to the valley and push furniture around so homes will be Dressed for Display before they hit the market. Right?
Absolutely! I am a firm believer in the power of home staging!
Yes I know your are. I've seen some of the things you say. I talked to hubby when he finally arrived and he says the last person he talked to about real estate was a fellow who was planning on being booted by the new freeway. Apparently he plans to take the money and run -- to another state. Well we will stay alert. Just as I'm on alert for ajbg. <That is not a typo. :)
Hi Tony, great story!! I love that you went after that earnest money. I just had an escrow fall through due to inspection issues, however, I will be more diligent in the LSR and LSU paperwork!! Thanks for the lesson.
I was actually disturbed by the jailbird guy...gave me the weebie jeebies...
Karen - I don't think he's been introduced to Sherrif Joe yet - or he would have a different expression on his face! Thanks for stopping by.
This is a great blog...I think your clients were kind in only accepting 50% for damages. I think it's great that you represented your clients so well!!
I know that Jeff Pickering and I have seen odd situations like this from time to time. I hate to say it but some Realtors who we began relationships seem to be hoping we would "make the numbers work" to get a deal through. Once we start seeing a pattern from these Realtors, we usually see them fade away. My point is that the client is being coached by the Realtor to do something that is ultimately illegal.
Jess Rankin, Pickering Group
Here are some other prisoner photo suggestions (just to Raz you a bit):