Can You Lose Your Escrow Deposit Because Your Buyer’s Agent or Lender is Not Diligent?
Yep! Think Twice Before You Hire an Inexperienced Agent
In 2017, the Florida Bar and Florida Realtors made significant changes to the “As-Is” Residential Contract for Purchase and Sale and the FAR/BAR Standard Contract. One of the biggest and more controversial of the changes was the replacement of the phrase “loan commitment” with “loan approval,” and the duties such change imposed on any prospective buyer to keep the seller informed of the loan approval status. The 2017 standard real estate contracts mandated the buyer to inform the seller in writing prior to the expiration of the loan approval period (usually 30 days) if they were unable to obtain loan approval. The change also provided that upon the expiration of the loan approval period, the buyer must inform the seller in writing of the inability to obtain the loan approval, if they were uncertain, and within three days after receiving such notice or if no notice was given, the seller was given the opportunity to cancel the contract, return all escrows to the buyer and accept any back up contracts which existed.
The only problem with this new process was that many lenders would issue the “loan approval” as if it was a basic loan commitment, and fail to obtain all the necessary information, such as appraisals, insurance, etc., within the loan approval contingency period. Furthermore, buyers would assume that if the appraisal came in too low or some other property condition arose after the expiration of the loan approval period which otherwise prevented loan approval and closing, they would have the opportunity to demand a cancellation of the sale and have their escrow returned. Buyers’ agents, relying on further language found in the financing contingency provision allowing lenders (and ultimately buyers) an “out” upon the failure to satisfy all property conditions, would demand a cancelation and return of their buyer’s escrow, no matter when these property condition issues arose. They would not alert the buyer of the risk of having to disgorge their escrow to the seller if the appraisal was too low to allow the lender to provide the loan, when the appraisal came in after the loan approval period had expired. Buyers and their agents tolerated a lender who dragged their feet on getting an appraisal and never verified that all property conditions were satisfied prior to the expiration of the loan approval. Worse yet, most would ignore the requirement of sending written confirmation to the seller of the written loan approval or request an extension of the financing contingency/loan approval period to satisfy all property conditions. This resulted in multiple escrow disputes in instances where the party sought to cancel due to property conditions which arose after the loan approval period ended, and which prevented the lender from issuing the loan.
As with any major change in standard industry forms, it took about two years for this issue to percolate to the District Court level. In the recent decision, Florida Investment Group 100, LLC v. LaFont, Case No. 4D18-2075 (Fla. 4th DCA 2019), rendered on April 24, 2019, the Court resolved this narrow escrow dispute issue. This decision has turned the real estate industry on its head. Unfortunately, most buyers and their agents remain unaware of the opinion’s implications. What the Court determined was that if a buyer had a financing contingency, then it was the buyer’s non-delegable duty to keep the seller informed of status of its loan approval. If the buyer is uncertain or if all the conditions have not been satisfied necessary to determine whether loan approval for closing will be approved by the lender, including property conditions such as a low appraisal, then the buyer has a duty to seek in writing an extension of the financing contingency/loan approval period or cancel the contract and demand their buyer’s escrow back prior to the loan approval period expiration. If the buyer fails to do either, the seller can rely on the initial loan approval provided and assume the buyer will close; if the buyer is unable to get the loan due to the property conditions and close, the buyer forfeits their escrow.
In light of this decision, real estate brokerages/agents may face liabilities they otherwise would not have imagined. Florida Statutes Section 475.278 (2) and (3) requires every agent, acting on behalf of a transaction brokerage or in a single agent capacity, to provide “skill, care and diligence” in performing their duties. The buyer who ends up forfeiting thousands of dollars will inevitably blame the agent for failing to seek the extension or inform them of the risk they face in losing their escrow deposit. Additionally, many mortgage loan brokers and/or lenders will face potential liability for failing to timely obtain appraisals within the loan approval period or failing to timely report the findings to their buyers so as to allow them to cancel the sale prior to the expiration of the financing contingency. Most buyers realize that their real estate agent gets paid by the seller or pursuant to a co-brokerage fee. The buyer agent’s skill is not typically something the buyer thinks about. More importantly, with access to buyer agents through Zillow and Realtor.com, and not through referral, most buyers accept representation from that initial call without knowing the caliber of the agent representing them. This decision may change that. The expertise of the real estate agent and lender will no doubt become one of the most important hiring decisions for buyers in the future if they wish to purchase a home without potential risk of forfeiting their escrow deposit. The moral of the story is to always hire a reputable real estate agent from a reputable brokerage with a history of training and educating their agents.