I’m sharing a new series on real estate sale mishaps; here’s the biggest one. 

 

Arguably the worst thing that can happen in a real estate transaction is a failure to monitor the buyer approval date (Paragraph 2A of the Third Party Financing Addendum), which leads to the loss of your buyer’s earnest money. 

When your buyer needs financing for their home purchase, you fill in Paragraph 2A of the addendum and include the number of days your buyer has to obtain financing approval. The contract states that if the buyer obtains this approval within that period, they can move forward with the contract; if they’re unable to obtain financing, then the buyer is able to cancel the contract and have their earnest money returned to them. 

Here’s the critical mistake I’ve been seeing: Real estate professionals are accidentally letting their buyers exceed that date without obtaining final approval, which leaves them unprotected if they’re unable to obtain it in the end. Per the contract they signed, they won’t be entitled to a return of their earnest money. Please don’t blame the lender, and please don’t blame your buyer; you’re the professional in the relationship, and it’s your job to monitor that date. 

“You never, ever, ever want to be the reason your buyer loses their earnest money.”

If you see that date for buyer approval approaching and a conversation with the lender reveals that the process will take more time, you have a couple of options. You could either submit an amendment extending the time for buyer approval, or you can cancel the contract. TREC even provides a form for the latter option called “TREC 01A: Notice Pursuant to Third Party Financing Conditional Approval,” which you’ll submit along with the Notice of Termination of Contract and the Earnest Money Release forms. 

I know what you’re thinking: “My buyer really wants this house!” That’s okay; if they obtain buyer approval two or three days after contract termination, and the seller still wants to sell, you can piece the deal back together. If they don’t get approval, then you’ve wisely protected your buyer’s earnest money and left them in a position to buy another home when their financial situation improves. 

Fortunately, this colossal uh-oh is completely avoidable if you remain diligent. If you have questions about this or any other real estate scenario, give me a call or shoot an email. I’d be more than happy to talk it over and share my knowledge and years of experience with you!