We’ve heard the stories of contract holders losing their deposits, but a plugged-in reader is hoping for a little guidance from somebody who hasn’t.

I put down a nonrefundable deposit a year ago at a new development. Now that I am about to close on my unit, there’s been a change in my financial circumstances for the worse (because of the recession and through absolutely no fault of mine) and I can no longer obtain loan approval. I did obtain preliminary loan approval when I first signed the contract, so that contingency has already been taken out of my contract.

I need to cancel my contract, and it seems like the developer will insist on keeping my deposit. I’ve heard that in San Francisco, developers will often give money back to the buyers because it is so easy to find another buyer. Is this really true? And if so, is this changing due to the worsening market? I’m interested to see if any other SocketSite reader has cancelled his/her contract and has been able to get their deposit back.

We’re not so sure about that “often,” although we do know of a few big developers who have made exceptions based on significant changes in circumstances (for which you might be able to make an argument). And we can’t tell you how it’s going to play out moving forward. But perhaps a reader (or a friend of a reader) can share a success story (or two).
Infinity And One Rincon Hill: Closings By The Numbers To Date (2/29) [SocketSite]

46 thoughts on “We Know About Losing A Deposit, But What About Getting One Back?”
  1. These building spend enough on marketing that they would be wise to just give the deposits back and pretend that everything is fine. I might even “act” excited to give the deposit back to leave some doubt in the mind of the customer, and maybe he/she would think twice about canceling the deposit. Buying a home and justifying its value is driven largely on confidence and ignorance, but I’d argue that these towers cannot afford to have bitter customers trashing the development all over the CL/SS/TFS. These developments should really attempt to build as much confidence as possible. If losing a few $35k deposits is going to crush the development finances than they are already in big trouble — so maybe it is time to dump it.
    Also, the email from the reader seems a little to “innocent” and more of a ply by someone to strike up a fire. But hey, who doesn’t love a little fire! 🙂

  2. Insideman is correct. I had my sales contract reviewed by 2 different attorneys (1 was a litigator). Both agreed that the contract (like most new developments in SF) was IRON-CLAD.
    Although I am not happy about it, I am more than willing to cut my losses.

  3. If I were you I’d put an ad up on craigslist and try and get someone to buy your contract. if you got in earyly–2-3 years ago. you can prolly find a buyer. If you just got it in the last 12 months at 2007 prices then im not sure what you should do.

  4. if your financial situation changed then it sounds like your problem. certainly not the developer’s. if you signed a contract you should hold up your end of it; you committed to buy the unit with financing and gave a deposit to guarantee that-you are now unable to perform. sounds pretty clear cut to me.

  5. I agree he owes the money under the terms of the contract paco, but to say somehow he “should hold up his end”….is bs. He is holding up his end, there are three parties to the transaction at the financial comapnies are the ones who are not able to meet their side of it. So I don’t think he is to blame –AT ALL. that said, he prolly isnt getting back that deposit unless he got in early and can resell the contract.

  6. YOu’ve got a couple options, here are a few:
    (1) You can have the contract reviewed and see if there is a way to get out of it because of the unforseen circumstances. This will likely not work.
    (2) You can sell your contract to someone who is willing to pay what you paid. You can do this even if the contract prohibits it, you just have to structure it differently in that case.
    (3) If you put down more than 3% you can get back any amonut over 3% if the unit ends up selling for more than you agreed to purchase it for. There are some more details on this one, but that is short and quick of it. In a down market like now, however, that will not be likely.
    I would suggest you look for someone to take over the contract and delay the closing as long as possible so you can do so. If you do give up and you did pay more than 3%, make sure they supply you with an accounting within 60 days of the closing on the property to the final buyer. If they do not, get a lawyer and get your money.

  7. Doesn’te typical sales contract have a non-assignment provision? If it does, I would think that the non-assignment provision would prohibit transferring the buyer’s rights under the contract to a 3rd party.
    While the buyer might ask the developer to waive the non-assignment provision, I would think the developer would be reluctant to do so if any unsold units remain in the development. The developer would rather the 3rd party purchase a unit directly from the developer rather than have the right to purchase a unit already under contract be assigned to him.

  8. cooper, you wrote
    He is holding up his end, there are three parties to the transaction at the financial comapnies are the ones who are not able to meet their side of it. So I don’t think he is to blame –AT ALL.
    so let me get this straight; he put up tens of thousands of dollars for a *nonrefundable deposit* based on assurances from a lender. the lender backs out and so he loses that deposit.
    not his fault AT ALL as you say.
    i do not think that this is all there is to the story. maybe, for instance, the lender required the borrower to maintain certain financial ratios in order to continue to qualify for the promised loan. he did not so he loses out. sounds like his fault either way; he did not maintain his financial health or he did not make the lender responsible for his deposit.
    nobody forced this guy to put up the money. no bank promised him the money no strings attached (or else he could have held the bank responsible). sounds like his fault and it sounds like you are helping him stay in denial of that…

  9. And this is how it all begins to spiral…..
    For those who think the market won’t go too far south, well this is the beginning. It’s stories like this that create a market where lower prices are inevitable. This “buyer” has now turned into a “seller”. He/She may not have wanted that to be the case, but he/she needs an exit strategy. Granted, renting may be a viable exit strategy (but not likely given current price/sq ft costs). This person has to unload. Even if this person eats the deposit, the developer then has to unload.
    Combine this with the story below on Oakland’s condo’s auctioning off….. well, we’re just seeing the beginning of prices coming into line with where they should be in the first place. Granted Oakland isn’t SF. It will be interesting to see what those auctioned off condos sell for as an auction is the best measure for what something is truly worth.

  10. To Paco,
    It’s possible he was required to do X by the lender and didn’t. But 90% of the cases is that the lender has lost the ability to fund the loan. For example if before they only required 5% down, now more than likely he needs 10 or 15. That’s them changing the terms, and that’s not his fault. Perhaps he did something crazy like he blew his deposit money on a new ferrari, but most cases like this will be lenders being forced to change the terms because the mortage market has collapsed (it is doing so as we speak), and they just don’t have the money. So in that case, why should this poor guy lose his deposit because the mortgage market collapsed. Then again, the builder shouldnt be on the hook either so yeah he needs to sell his contract.

  11. A pre-approval is not an ironclad guarantee to loan money. You lift funding contingencies based on them at your own risk. Especially if your closing date is far enough off in the future that there’s a decent chance you’ll get laid off between the time you get pre-approved and the time you close.
    Good luck getting your deposit back, but consider what would have happened had the change in your financial circumstances happened AFTER you closed on the place.

  12. hey coop,
    would YOU part with a $20-$30k deposit knowing that your *pre-qualified w/5% down* promise from a lender (sometime in the future at interest rates to be determined) was iffy (at best)??
    would you count on a lender that had the potential to change the terms without penalty? why?
    lets face it; this guy was taking a big chance to put up a nonrefundable deposit over a year in advance without a solid plan for financing it. esp. if he is looking at less than 20% down on a jumbo loan.
    would YOU take such a risk? would you advise any friend to do so? do you really think such behavior is to be excused rather than ridiculed??
    i think this chap, like many others, got caught up in the belief that he needed to secure an apartment way in advance or else be left behind. so he did not properly weigh the risk involved. in effect, people in this situation believed that they could predict the prices and availability of real estate and credit a year or more in advance. so confident were they in this ability to see into the future that they handed over tens of thousands of dollars as proof. they did not, or could not, lock in their ability to perform though.
    in other words, the lender never promised them a rose garden-nor was the lender paid to do so. that, my friend, is speculation.
    do you feel bad for all the entities currently going kaput b/c they
    sold long and borrowed short while relying on a never ending steam of easy credit?

  13. When you put that deposit down I’m sure someone said something to the effect of loosing your deposit.
    California Residential Purchase Agreement and Joint Escrow Instructions..
    Did you check 2k or 2L via #2 of the above mentioned paperwork?

  14. Maybe you should start an auction for your contract on ebay. I’m sure someone will buy it and perhaps salvage what value may be left — maybe even make more than your deposit depending on what you have under contract!

  15. Your deposit was put in good faith that you’d procure financing for the purchase.
    ————————————————-
    #16 of the CA. Residential Purchase Agreement
    Liqudated damages – if buyer fails to complete this purchase becasue of Buyer’s Default, seller shall retainas liquidated damages, the DEPOSIT actually paid. If the property is a dwelling with no more then four units, one of which intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shall be returned to Buyer, Release of funds will require MUTUAL, signed releases instructions from both BUyer and SEller, judicial decision or arbitration award. BUYER AND SELLER SHALL SIGN A SEPERATE LIQUIDATED DAMAGES PROVISON FOR ANY INCREASED DEPOSIT.
    ————————————————-
    The only saving grace you have is arbitration.

  16. lawyerguy, thanks but you are wrong in one very important respect – if someone has made a 5% deposit and there is a liquidated damages clause, you get back the excess over 3% whether or not the builder sells the unit for more or less than your purchase price, or even sells it at all. Liquidated damages means that is the pre-agreed amount of damages, period. So the benefit is that the most you can lose is 3%. The downside is that you lose your 3% even if the unit is resold for the same or a higher price . . .

  17. I know someone who needs to cancel his condo purchase because he lost his job. It seems unfair that he is going to lose his deposit after losing his job as well.

  18. Slight topic change. For those who do walk from their deposits can the loss be counted as a short term capital loss? From the tax code at SUBCHAPTER P /PART IV/Section 1234 (SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES) it appears so, but I’m no tax accountant. And if it is a capital loss, what determines which tax year the loss can be claimed in?

  19. I recently got out of a contract using my finance contingency and I got my full deposit back. It was a new condo development with less than 50% of the units sold. When I tried shopping around for mortgages I had trouble getting the building approved. I used this as an excuse to get out, even though my real reason was that I had buyer’s remorse after signing.
    In your case if you’ve already released your finance contingency then it will be more difficult. When I was researching getting out of my contract I came across some articles discussing getting out of a contract if your financial condition decreases significantly. I think most people who do this though use the finance contigency.
    Your best bet is to consult a real estate attorney. You may want to ask your agent to talk to the seller’s agent to see if anything can be done. If you make it seem like you will dispute the seller holding the deposit, then the seller may release it back to you. It’s expensive and time-consuming to have to arbitrate over the deposit (assuming your contract had an arbitration provision, otherwise it will go to court which is even more expensive). So the selelr has an incentive to not get into a protracted dispute with you over the deposit.

  20. Since the SF market is so blistering hot, why not just resell your contract on craigslist?
    Maybe offer the new buyer a little tiny discount just to sweeten the deal.
    Obviously the developer is going to keep as much of the deposit money as possible, beecause … they like money.

  21. Life is not fair, and besides fair is not even an issue in this case. The buyer intended to buy and made a committment to buy with the 3% non-refundable deposit way in advance of the closing date. It’s like a commodoties trader that places a call for a future contract and it goes the other way. Money is made and lost everyday.
    I believe that the seller should realize that the economy has tanked and that some buyers will not be able to close on their committment, and perhaps work with them by allowing transfer of contracts or partial refunds, etc.. But this is not something that the seller has to do and their unwillingness to work with buyers in distress will certainly be remembered as building two and the remainder of building remains unsold.

  22. Are you sure about forfeiture of the 3% even if the even the unit sells for the same or a higher price Robert?
    With the amount that 3% of some of the these places constitutes, a court may construe the relevant clause as a penalty and not as liquidated damages.
    “If the sum payable is so large as to be far in excess of the probable damage on breach, it is almost certianly a penalty.”
    For all those referencing the California Residential Purchase Agreement – “The mere use of the words ‘liquidated damages’ is not decisive, for it is the task of the court and not the parties to decide the true nature of the sum payable.”

  23. Perhaps moving forward we could add that into the body of the contract – “If buyers job is terminated deposit will be returned” – That just doesn’t sound right. Markets run amuck cause such grief that you really have to take a step back and take the emotion out of it.
    The big question I always ask myself is how bad did this person want the property and what efforts were put forth to make IT HAPPEN.

  24. Request a full refund in writing. Most likely the ORH sales team will point to the contract and refuse your request. At that time try for a partial refund…it’s worth a shot but ultimately you’re still bound by liquidated damages. Any written communication should come from a real estate attorney. That way they know you are actually considering legal action. Most RE attorneys cost about $250 – $300 per hour so do note that Legal costs can quickly spiral out of control. Think carefully before you proceed much farther with mediation or arbitration. I’ve found most agents will stay out of any legal dispute b/w buyer and seller. If you’re still interested / capable of buying at a lower price try re-negotiating. They may be willing to take a 50K reduction rather than loose a sale. Also, try another lender. If you have decent credit it’s still quite remarkable that you can get a loan. Good luck!

  25. Yes I am sure – the likelihood that 3% would be viewed as an excessive “penalty” is virtually nil. Particularly in light of the fact that the statute itself effectively validates the 3% figure . . . by saying that you cannot go higher.

  26. What I would do is to pretend you just BOUGHT a resale, and post on blogs like socketsite that you
    A) bought a resale from another buyer and
    B) have instant equity and are contemplating a $150K cash out refi.
    That will make others think that buying a contract is a profitable, no-lose deal.
    Then I’d try to sell your contract on craigslist before anyone figures out that your socketsite post is a fake, and that you are really selling, and didn’t just buy.
    Oh wait, I think someone beat you to it…

  27. @ Robert
    Not to bore everyone with a legal debate, but the statute has some other interesting things to say. The caveat here being that I have never litigated a case like this.
    The statute makes the presumptive amount 3%, but the buyer may still show that 3% is unreasonable. There are two factors to determine whether 3% is unreasonable: the circumstances at the time the contract was made AND the price and terms a subsequent sale (if within 6 months).
    It seems to me that 25-30K might be unreasonable if the unit resells for the same or more (especially in a short amount of time). But I’ll trust you as real property is not my area is expertise.

  28. Paco,
    Generally, my preference is not to buy real estate with less than 20% down, and I am what most would consider a risk taking person by other measures. I don’t like PMI insurance so I tend to hit the 20% cap and after all, its my home and so I tend to be less risky there. I also always use fixed mortages, no variable arms. That said, I would do a loan based on the assumption I would not lose my job. Who doesn’t? Throwing this right back at ya, would YOU apply for financing based on the assumption that YOU would not lose your job. Of course you would. That’s why I don’t think saying its this guy’s fault when for most people facing this problem (the vast majority) the problem is not that their income changed, its that the lender is having financial problems. In those cases, the winner is whoever wrote their side of the contract better in case the lender has problems (three parties to the transaction, not 2, but in neither case would I fault the guy who put his deposit down based on good faith. It’s more of a shit happens type of situaton that a lot of people are going to be facing now.

  29. How about this perspective. You actually win – declining market. Get a new job and hedge; buy low.

  30. Yes, I was referring to the guy from a day or two ago who claimed to have bought a contract for a song and was going to do a cash out refi.
    Give it up, Alex. The buyer would have to show that the 35K or so he’s going to lose was unreasonable, when the seller has a sales and marketing staff to feed, a showroom to pay rent on, and they’re probably selling 1 or 2 units a month if that. Their costs of reselling are going to be difficult to estimate with certainty and at least in the ballpark of 35K, making any recovery a wash after the guy pays his lawyer.
    Get your deposit back? Fuggitaboutit.
    It won’t be the last bad business deal you make. It happens. You were caught up in the mania of can’t lose real estate and what can I say, it went against you. You’ll do better next time. Move on.

  31. yo coop,
    this is what the original poster said:
    I put down a nonrefundable deposit a year ago at a new development. Now that I am about to close on my unit, there’s been a change in my financial circumstances for the worse (because of the recession and through absolutely no fault of mine) and I can no longer obtain loan approval. I did obtain preliminary loan approval when I first signed the contract, so that contingency has already been taken out of my contract.
    he removed the loan contingency (or allowed “them” to do so and then signed the papers…).
    he admits that he *can no longer obtain loan approval*
    he never says that the lender changed terms.
    why are you assuming its the lender’s fault?
    and i ask you again- would YOU rely on a non-binding promise from a lender to hook you up in a year or so once its time to close? and then pledge $20-$30k based on that promise?
    that’s pretty much what we’re talking about here.

  32. Agreed with tipster’s comments above (uh oh – this is becoming a trend) – I don’t think the equation is as simple as the comparison of your contract price with the eventual selling price of the unit to determine damages. The developer will incur additional holding costs (loan costs, taxes, homeowner’s dues/maintenance, etc.) along with additional selling costs to resell the unit. They definitely lose money even if you back out and are replaced by someone else just in the wasted time/effort to process two transactions rather than one. You can bet a developer is going to argue that their costs are easily 3% of the purchase price to resell a unit. Good luck – if you can get out of it and get your deposit back after you have released all your contingencies, count yourself lucky.
    And cooper – you hit the nail on the head as to the cause of the bubble over the past 5 years – in the past most people would save up enough money to make the 20% downpayment cut off to avoid costly PMI, but in the past 5 years, PMI went out the window and you could do 90-100% financing with piggyback loans sans the PMI cost. The penalty for a small downpayment was essentially eliminated and hence money flooded into the market and prices shot up. Oh, and big surprise, it turns out that lending marginal borrowers 100% of the value of their home which is selling at its historical peak value without any mortgage insurance is a bad idea. Who could have seen that coming? Looks like banks are tightening up a bit and requiring, gasp, 10% down now – tighter than it was recently, but still quite a bit looser than traditional lending standards.

  33. “lawyerguy, thanks but you are wrong in one very important respect – if someone has made a 5% deposit and there is a liquidated damages clause, you get back the excess over 3% whether or not the builder sells the unit for more or less than your purchase price, or even sells it at all. Liquidated damages means that is the pre-agreed amount of damages, period. So the benefit is that the most you can lose is 3%. The downside is that you lose your 3% even if the unit is resold for the same or a higher price . . .”
    I’m happy to post the statutes if you would like, but this is a common misconception. The way it actually works is this. If your deposit is below 3%, the builder gets to keep it. If the deposit is greater than 3%, the builder must provide an accounting and gets to keep the GREATER of 3% or the costs directly attributable to the breach. Thus, if they sell for $40k less, for example, the costs will include that $40k along with many other smaller costs and it is unlikely you will get back your deposit.
    Check out Cal. Civ. Code 1675

  34. lawyerguy, you should know better than to read the statute without also reading up on experts’ interpretations of it!! Take a look at http://library.findlaw.com/2004/Jun/1/133448.html.
    As the author states:
    “In addition, the new formula for calculating liquidated damages does not appear to provide much relief for developers. To begin with, developers now have the burden of performing an accounting of their loss. Second, AB 728’s definition of loss neglected to include the developers’ anticipated profits, which is the traditional method of calculating damages for breach. Instead, the developers will only recover their “losses” to the extent that the price they receive from subsequent buyers is below the developers’ actual cost. In other words, developers cannot recover their lost profit in the event of buyers’ breach. Instead, developers can only recover their out-of-pocket costs, likely to be less than the amount paid by subsequent buyers, resulting in retention by sellers of no more than 3% of the first buyers’ purchase price as liquidated damages. In the end, developers are actually in a worse position under the same circumstances than under the prior law.”
    So in the end, 3% remains the maximum amount at risk.

  35. Robert,
    I like the facts that you’ve done some research, but I’ve got to tell you that your source is close to how things play out, but slightly inaccurate. Probably because it is from 2004. it is quiet a bit more complicated than what I or he says, but it generally plays out to allow the builder in this market to keep the entire deposit. I’d be happy to represent a builder against a breaching buyer represented by the commentator in that article.

  36. tipster and Miles:
    Objection! Assumes facts not in evidence.
    However, I agree if your assumptions are true. If costs are in the ballpark of 35K, then it is not unreasonable. I’m skeptical, however, that if a buyer is replaced in a short amount of time with another buyer, costs would be that high. And as difficult as it might be to estimate, that is exactly what a developer will have to do if the buyer demands it. If it was my 30K, I would want to see the numbers (supported by solid evidence). Of course, you’re right, I don’t know too many attorneys that would take a case where the total amount in controversy is 30K. Maybe I’ll see if I can get some pro bono credit for taking on such a case.
    Miles – Of course the equation is not that simple. But that’s not what I said. I identified the factors as stated by the statute. The buyer still has to gather evidence to support his notion that 30K is unreasonable. If the developer experiences a loss, that certainly affects the equation.
    In any event, my argument is limited to situations where the subsequent sales price meets or exceeds the original anticipated sales price.
    Lawyer guy – please explain how Robert’s quoted language is no longer accurate. It seems it would be difficult to show over 3% in damages on one of these places, if a developer cannot claim lost profit and is limited to actual damages.

  37. Yes, lawyerguy, how do you expect to get and keep clients with that sort of mealy-mouthed response (“it is quite a bit more complicated than what I or he says” and “it generally plays out to allow the builder in this market to keep the entire deposit”). What is your basis to say that the statute is not honored, where people actually litigate the issue?

  38. tipster and Miles – I should have clarified at the beginning of my last post that I never placed nor did I suffer the loss of a deposit. I merely responded to some of the posts referencing the law regarding return of a deposit.
    Also tipster, I believe it is probably a much worse business decision to walk away from 30K without so much as demanding an accounting from the developer as provided for in CCP 1675. At minimum this person should send a letter demanding an accounting if the unit is resold within six months.

  39. Got a question – if one backs out of a contract and has put 5% down I understand that an aoutmatic 3% is kept by the developer. When does the remaining 2% get released to the (former) buyer? I am confused because I believe I read someones comment that it was released after the unit is sold? Has anyone out there actually backed out and can share your experience. If it is Infinity information that would be quite helpful.

  40. Curious – If the “provision exceeds 3 percent of the purchase price of the residential unit … The seller shall perform an accounting of its costs … within 60 calendar days after the final close of escrow of the sale of the unit.”
    Of “if a ‘new qualified buyer’ has entered into a contract to purchase the residential property in question, the seller shall perform the accounting within 60 calendar days after a new qualified buyer has entered into a contract to purchase.”

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