Somebody wrote this in a real estate column in my paper:
That’s it. No other explanation or details.
Sure, deals fall apart at the last moment. But where’s the scam? The seller doesn’t transfer any money before the closing, at least not in my state. What would buyers get out of doing this to make it a scam?
Also mystified, because as I understand it where I am, such a buyer would lose any earnest money they had put up in that situation. The only thing I can see working in a situation like that is if a collaborator of the original buyer then swooped in with a lowball offer to try to score the sale at a bargain while the seller is distraught.
Sounds more like someone was disappointed by a flaky buyer and decided to invoke a bit of hyperbole.
Still, if you wanted to be sneaky as a buyer, you could have a friend make a lowish offer, then, if the offer is accepted, flake during attorney review. In this way, you get information about what the seller is willing to take without having to give any information in return.
What happened to us, many years ago, was a guy saw our house for sale. He didn’t say he was interested at all. He befriended my husband and after a short time, asked if he could park his backhoe on the property. Then he asked to move his trailer onto the property. He hooked up to our power and water without asking.
Then, when the time had come that we had to move to another state, he said he wanted to buy the property. Because he was the ex’s friend, we agreed to $1 earnest money.
On the day of closing, we were scheduled to leave right after the transaction.
He called us at the bank and said he’d been delayed and we should go ahead and sign the papers and he’d come in as soon as he could.
He never showed. Not only did we not have the money we needed to start over in another state, we had to pay someone else to handle his eviction.
His scam was free rent for nearly a year. Probably not what the op’s guy was talking about.
I wonder, though, could it have been a short sale to avoid foreclosure. The seller would then be so far behind, he couldn’t avoid foreclosure. Then the buyer could get it for less.
Over here in the UK we have a somewhat similar problem. You advertise your house and I make an acceptable offer. No deposit is required but you will probably make an offer on your new house.
A few days before exchange of contracts (the point at which ownership changes) I say I can’t raise the cash and make a lower offer. You are now in a bind. You have spent money on lawyers and possibly surveyors and if I don’t buy your house, then your purchase also falls through.
You are obliged to accept my new offer and borrow the difference from wherever you can get it. I get your house for a couple of thousand less than we originally agreed. No law has been broken.
On it’s face the statement makes no sense. In typical residential RE transactions involving financing a buyer will (normally) have incurred a number of non-refundable expenses related to inspections and appraisal fees etc. few days prior to settlement. At that point the due diligence period is over and the contracts are usually hard.
It has become somewhat more common for buyers to get cold feet and walk away just before settlement than it was in year past. The reason for this is that if the seller has accepted a small down payment the buyer will sacrifice that to get out of the deal. The seller can still sue for specific performance of the contract, but that effectively ties up the property from being sold while the action is ongoing. In many cases sellers will take the deposit as damages and put their house back on the market vs trying to force performance of the contract with an unwilling buyer.
The comment you reference is someone who is just babbling re it being a scam. The out of pocket expenses up to settlement are largely the buyers unless the seller is fixing items related to the the house per the buyer’s demands.
This is almost never true, at least in the states where I have done business (NY & NJ). The “earnest money” is money put in escrow as a show of good faith (and that they actually have the money and can’t use it for something else). Although technically at risk, I have never encountered a situation where the seller was allowed to keep the money. If the buyer walks away, the seller has to sue the buyer to recover the money. This can inconvenience the buyer, but it also screws the seller who often cannot put the property back on the market. If the buyer has been especially egregious in his behavior, a judge may order the buyer to pay the seller’s lawyer fees. Almost universally (in my opinion) real estate lawyers will advise against this, telling the seller to put the house back on the market and move on.
I suspect that what the buyer is doing is simply making an offer on a house that he determines the sellers need to move fairly soon. He draws out the process as long as possible. At closing he makes unreasonable demands hoping the time pressure will make the sellers cave. They don’t. He walks away, looking for another property. Very often, agents are aware of this sort of buyer and will warn the seller off. This is one very good reason to use an agent. They want to waste their time even less than you.
Should you decide for whatever reason not to complete purchase–or if the purchase falls through for any reason out of your control–the seller reserves the right to retain your earnest money, so long as he fulfilled his contractual obligations.
5 to 10% is quite a substantial amount. My mother is a realtor in Florida. She has seen some deals fall apart, and the earnest money in every case went to the seller.
In some jurisdictions (I believe this includes New York and New Jersey), there is mandatory attorney review, i.e. there is a period of a few days where the buyer can back out for any reason on the advice of his attorney.
Also, the purchase contract usually contains a provision that the deal is subject to a satisfactory inspection of the house. Of course the inspector will always find a few things wrong with the house. This is normally used to chisel the seller out of a few hundred or thousand dollars but in theory it could be used to bust the deal.
I’m sure you’re allowed to ask for a deposit but there’s not a hope in hell of you getting one. The UK process is such that the seller advertises the house, the prospective buyer makes an offer, which is accepted. The buyer then organises surveys/ inspections and their legal stuff, whilst the seller gets their own legal declarations in place. When everyone is ready there is an exchange of contracts, followed a few days later by completion. Nobody is held to the deal until contracts are exchanged, by which point both sides have incurred expenses. The new owner takes poasession on completion. It can be very precarious and stressful as you can imagine and does invite situations such as the one described, where a buyer can take advantage of the shifting power balance and force a lower price late in the process.
This is in England and Wales specifically, Scotland has a slightly more robust process IDK about Northern Ireland. There were moves to tighten it up but they were eventually watered down to nothing.
That’s really strange. If I were bidding on a house in the UK, I would be tempted to offer a deposit right along with my bid. Just so that the seller would know I’m not screwing around, which would make my bid more attractive, helping me in the negotiating process.
By the way, I did a Google search and found what purports to be a “Citizens Advice” web site from the UK.
Hmmm, I didn’t know this was becoming more common in this real estate market. Perhaps it really is people developing cold feet.
It happened to a friend in Florida during the housing bubble and he did get to keep his earnest money. At the time, I thought it was a scam that worked like this: put up earnest money while at the same time trying to find a buyer for the house. If you can’t immediately flip the property, just walk away. But that doesn’t make sense in a housing market that isn’t super-hot like in the housing bubble.
When I sold my home a few years back, I told my agent that I would not drop my price from what I was asking. I was in no hurry to sell, and I knew I’d eventually get what I wanted.
My first interested buyer was very interested; they were investigating the school district and discussing ways to expedite closing. My agent called me, all excited about this, and to tell me they made an offer that was 5% less than my selling price. I told her she was wasting everyone’s time.
My “counteroffer” was 5% higher than my original asking price. The guy went ballistic, accusing me of running a scam.
Getting a mortgage is difficult to near impossible. Maybe the tenative buyer doesn’t want to admit that their mortgage application was turned down at the last second because they don’t have the magic (now 640) FICO.
This is exactly what happened to us in Louisiana. That was not a scam - the woman was splitting with her husband and decided to get back with him just before closing. We did consult a lawyer and were told exactly what you say above.
The money is still in escrow 30 years later as far as I know.
We were under the impression that the deposit meant something - silly us.