Market Conditions – Querin Law, LLC | Phil Querin

[This article is one of a series of upcoming posts dealing with real estate disputes in Oregon, ranging from transactional matters to litigation matters. Enjoy!]

Introduction. The term “Earnest Money Deposit” is familiar to most people – at least on the surface: It is the “deposit” that prospective buyers initially put down when offering to purchase a home. Metaphorically, it shows their offer is made in “earnest.” But beyond the name, there are many tripwires that can arise, such as whether it will be refundable if buyer changes their mind? What if the seller wants an early release of the deposit before closing? What if seller changes their mind; can they return the deposit and end the transaction?

The Forms. In Oregon there are two standard form Sale Agreements: (a) The OREF form published by Oregon Real Estate Forms, LLC. It is the oldest form, dating back to the late 1990s; it laid the foundation for the current form today. It has been continuously updated to comply with changes in Oregon case law, statutes, and Realtor standards of practice. (b) The Oregon Realtors Association (“OR”) Sale Agreement form which came into existence circa 2021 and substantially followed the substance of the OREF form, although it is formatted differently. For purposes of this article, the following discussion will be based upon the OREF form, simply because I represented the company for 20+ years and am familiar with the genesis (i.e., rationale) of each provision.

The Basics. Functionally, an Earnest Money Deposit (hereinafter “Deposit”) normally accompanies the buyer’s written offer, the terms of which are set forth in the Sale Agreement. In Oregon, if one or more Realtors are involved on behalf of the parties, the terms of the Sale Agreement will likely be written up on the OREF form or the OR form.

Once the terms of the transaction are mutually agreed upon, the Sale Agreement is signed, Deposit paid, and escrow is opened at a local title insurance or escrow company. Closing occurs after buyer’s purchase funds have been deposited, the loan has funded (unless it is a full cash offer and no lender is involved), title is marketable, escrow and title costs, prorates (e.g., for taxes, insurance, liens, and other expenses) have been paid, and the seller’s Deed has been signed and delivered for recording. The Deposit, which is technically a part of buyer’s downpayment, normally remains in escrow until closing, unless the parties agree that it will be disbursed earlier.

The main thing for all parties and their Realtors to remember is that escrow is a neutral depository; it cannot take any action without the joint written instructions of both seller and buyer; it will not act upon only one party’s instruction. Realtors are not parties to escrow and cannot give “instructions.” Once funds are deposited in escrow, their distribution thereafter must be jointly agreed upon by seller and buyer. This means that if there is a dispute over where the escrow funds are to go, it must be resolved either by joint agreement of the parties or pursuant to a court or arbitrator’s ruling. If no agreement can be reached, the title company has the option of tendering the disputed funds into court, filing a lawsuit against both seller and buyer, and asking for judicial instructions for distribution of the funds. This legal process is called “interpleader” and the title/escrow company can recover attorney fees for their efforts. It is a process seller or buyer should avoid for obvious reasons – it means pride got in the way of prudence.

Liquidated Damages. This is a legal concept in which the parties agree, in advance of entering into a contract, that because of the difficulty in establishing damages for a breach, a fixed figure is pre-agreed upon, i.e., it is “liquidated.” There is good reason for this; in real estate transactions, if the buyer fails or refuses to close, how will the seller “prove” they were damaged by the breach? In most cases, seller’s damages from buyer’s failure to close are a result of the property being held off the market for an extended time. But in such cases, to be damaged the seller would have to point to other offers that were rejected. However, once an offer is accepted, it appears as “Pending” on the local MLS and prospective buyers shy away from them. (There are other forms of damages such as “lost opportunity” or other events.)

But proving “what ifs” can be a formidable task. Ergo, the liquidiated damage clause is used to avoid these difficulties. It allows seller to avoid proving damages flowing from buyer’s breach. Caveat: Liquidated damage clauses are useful if properly used. But because the parties pre-agreed upon seller’s damages from buyer’s breach, they can become an unintended trap; if seller’s actual damages exceed the liquidated amount, seller is limited to the latter amount.

There are only two or three major Oregon cases on liquidated damages, and the law is fairly well settled. The basic elements of an enforceable liquidated damage clause will contain the following recitals (all of which are found in the OREF Sale Agreement form; the OR text appears to be shorter):

The parties expressly agree that seller’s economic and non-economic damages arising from buyer’s failure to close the transaction would be difficult or impossible to ascertain with any certainty;
The Deposit identified in the Sale Agreement is a fair, reasonable, and appropriate estimate of seller’s damages if the buyer defaults;
It represents a binding liquidated sum, not a penalty (i.e., it is intended to compensate seller, not punish buyer); and
The seller’s sole remedy against buyer for their breach of the Sale Agreement is limited to the Deposit. (Note that buyer’s remedy for seller’s refusal to close is not limited to recovering back the Deposit. See below.)

When Does The Deposit Becomes Nonrefundable? This depends upon whether the Sale Agreement contains any buyer contingency clauses. Both the OREF and OR forms contain such clauses; they both allow buyer an agreed-upon period to exercise his/her due diligence (e.g., for title review, property inspection, sewer, septic, lead based paint inspections, financing/appraisal, etc.). If buyer gives seller timely written notice that one or more of the contingency provisions have failed, the Sale Agreement provides that the Deposit will be refunded. But if not timely given, they are deemed waived and the Deposit can become nonrefundable. This issue is where a good Realtor can come in handy. When the parties reach agreement, the Realtor can be asked to provide a written timeline of the important contingency commencement and expiration dates.

Early Buyer Defaults vs. Last Minute Defaults. It is one thing if a buyer’s breach occurs soon after the Sale Agreement is signed, e.g., their check or funding transfer fails to clear; buyer suddenly changes their mind; or events of illness, death, etc. In such cases, the seller could quickly declare a default, refund the Deposit, and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction. In the case of a late buyer default, the seller may be severely damaged for, say, moving out of the home, having stored furniture, or paid a nonrefundable Deposit on another home.

A belated buyer default could become a Doomsday Scenario in some cases. Accordingly, in establishing the amount of the Deposit, seller should ask: “What is the worst thing that can happen?” “Can it occur here?” If so, the amount of the Deposit should be set at an amount to address it. Why? Because once the Deposit has been agreed upon, if it is insufficient to fully compensate seller for buyer’s belated default, it’s too late.

Who finally decides on the amount of the Deposit for the transaction? The answer is very fact-based. If buyer is ready, willing and able to close, seller needs to sell quickly (e.g. divorce or job transfer), and there are many available homes on the market, the buyer’s preference may carry the day. But in a tight market with limited homes for sale, the seller who can afford to wait for the best offer will likely determine the amount of the Deposit.

Tips, Traps and Take-Aways. Below are a few – there are many more.

Sellers should be careful when agreeing upon the amount of the Deposit. If it is too small, say $1,000 – $2,000, it may be inadequate to fully compensate the seller; conversely, the smaller amount makes it easier for buyers to default and walk away from a comparatively small Deposit.
However, a Deposit that is unrealistically large could be deemed unenforceable as a penalty. What amount would constitute a “penalty”? It varies with the facts; if the property is highly prized and listed for $5,000,000, a $100,000 Deposit may not be out of the question. But if the property is selling for $350,000, a $100,000 Deposit would likely be deemed a penalty, and declared unenforceable.
Conversely, in bidding wars when several buyers are vying for a property, who gets to the front of the line may be determined, in part, by the size of the Deposit since it could serve as an inducement to accept an offer – especially if it is made nonrefundable. (A risky step for buyers, but not unheard of.)
When it comes to tailoring a provision for disposition of the Deposit, Realtors should avoid the temptation of writing an amendment to the pre-printed terms of the Sale Agreement; legal assistance may be appropriate. For example, to state that the Deposit will be “nonrefundable” is inadequate. If there is a dispute, the buyer will likely argue that it was too vague to be enforced.
Here is a caveat regarding non-refundability issues: The Sale Agreement already addresses the Deposit and contains other preprinted provisions in the Sale Agreement stating the conditions upon which the Deposit is refundable. They will likely be inconsistent with a hand-drafted nonrefunability addendum. Such inconsistencies should be addressed in advance.
Although the Sale Agreement contains a provision for buyers to pay an “Additional Deposit” later in the transaction, it is frequently overlooked. Yet this clause can be very useful for sellers where the closing date is extended or other seller concessions are granted. The longer a transaction remains open and the home is off the market, the greater the risk of unanticipated issues arising.

Conclusion. Disputes over who keeps the Deposit can be a “zero-sum” proposition. That is, when a breach occurs, the Sale Agreement says the entire sum is either forfeited to seller as liquidated damages, or refunded to buyer. There is no middle ground; it is all or nothing. Unfortunately, some arbitrators may not heed that concept, and try to allocate a forfeited Deposit based upon “comparative fault” between the parties. This is an issue that seller’s attorneys may need to emphasize to the arbitrator. Conversely, buyer attorneys might argue that seller contributed to the events leading up to the default, and argue for an allocation of the Deposit, despite there being no language in the Sale Agreement addressing it.

Important Notes: (1) The Sale Agreement provides that if seller breaches and refuses to close, buyer may obtain a refund of the Deposit and seek damages including “specific performance” (i.e. requiring seller to sell per the Sale Agreement). This is because land is regarded as “unique” and recovery of money damages to the buyer are not the same as awarding him/her the property – more about that in another article. (2) If there is a dispute only over disposition of the Deposit, i.e., it is agreed the sale transaction is over, seller can and should put the property back on the market. But before doing so, seller must first inquire whether the same title/escrow company can close another transaction while holding the disputed Deposit. If they say No, the subsequent sale should be opened at another escrow or title company.

Lastly, remember, the Sale Agreement contains a prevailing attorney fee provision. Thus, the smaller the Deposit the riskier it is to litigate/arbitrate, since the legal fees can exceed the amount at issue. Losing a $15,000 earnest money deposit dispute and paying $25,000+ in attorney fees to the other side (in addition to your own) can be a bitter pill. Both of the two statewide Sale Agreement forms provide that disputes over Deposits of $10,000 or less must be submitted to Small Claims Court, where attorneys are not permitted to represent the litigants. ~ Phil

Below is an article I authored in early 2020. How times have changed!

In a recent Housingwire.com article (here) by Kathleen Howley, we learn that the current average 30-year mortgage interest rate of 3.24% is within one basis point[1] of its all-time low of 3.23%. According to article:

Fannie Mae projected last week the average this quarter would be 3.2%, followed by 3.1% in the third quarter and 3% in the fourth quarter.

Fannie Mae is forecasting an average of 2.9% for every quarter of 2021.

Continue reading “Interest Rate Retrospective!”

In a 2020 Reuters article (here), authors Ann Saphir and Lindsay Dunsmuir note that the Federal largesse of trillions of dollars currently being spent to address the inevitable fallout from sidelining millions of employees and businesses is far different from 2005 – 2009 when the financial and real estate markets fell into the abyss, causing the Great Recession.

Back then, the government, the press, and many in the public, measured deservedness for bailout funds by the metric of “moral hazard” – i.e. whether giving financial assistance to certain groups would be viewed and encouraging “bad behavior”.

For example with the advent of “no-doc loans” and “liar loans”, borrowers were able to qualify for home loans priced far beyond their ability to repay. At the time, the lenders and mortgage brokers were able to convince borrowers to “bite off more than they could chew” because if they got into trouble, they could either refinance the home, or resell it. Of course, this advice was based upon the theory that real estate does not go down in value.

But in 2007+ that is exactly what happened. Values tanked, thus resulting in borrowers being unable (a) to refinance – because they had no equity, and (b) to resell – because they were “underwater” i.e. their mortgage exceeded the value of the depreciated home. When that occurred, it meant that to convey title, the seller had to bring money to the closing table. This is what came to be known as “negative equity”. Thus, entered the era of the short sale.

So when the Great Recession hit, federal bailout funds were not available to borrowers who had engaged in “moral hazards” i.e. they had fudged their numbers to lenders (or were viewed as having done so), and ended up with a home that could not be refinanced or resold. To make matters worse, banks were now chastened, and having seen the light, immediately began to raise their lending requirements to a point that few folks could qualify.

In the end, however, it appears that the yardstick of “moral hazard” was never really applied to the Big Banks, even though they were patently culpable by disregarding common sense underwriting and instead making loans to anyone who could fog a mirror.

The reason for the frivolous lending was simple; lenders sold their loans into the private secondary market, where investors, hungry for higher returns, bought these securities as if they were spun gold. So the Big Banks no longer cared about the financial bona fides of their borrowers, since they no longer carried the loans – borrower defaults became someone else’s problem. And the rating bureaus, like Moodys and S&P, became enablers in the ruse, by telling investors they were buying “investment grade” products, when they weren’t. See articles here and here.

And what became of the Big Banks who created this Ponzi Scheme? Well, the political decision was made that “moral hazard” would have to take a backseat to financial stability. In other words, the perps were bailed out for the good of the country.

But today, the picture is far different. The only fault that can be assigned to the travails of the American people is an errant virus, and it is wreaking havoc to consumers and businesses alike.

It remains to be seen whether Main Street will receive the same help from the government as Wall Street. Unfortunately, even though “moral hazard” is absent this time, the calculus ultimately remains the same: The loss of a Big Bank may still be viewed as more worthy of a bailout than the neighborhood Mom & Pop grocery. ~Phil

Introduction. Almost as soon as the COVID pandemic flared up, I began to receive calls asking whether the virus could constitute the basis for refusing to perform under a pending Sale Agreement. One broker reported that the buyer wanted out of the contract because of “uncertainty”.

These are not altogether unreasonable reactions to performance; after all, we’ve never experienced anything like this pandemic before. However, over the years, comparable issues have arisen, the most obvious being wars, strikes, and natural disasters. So let’s take a look at how the courts have dealt with these events in the past. Continue reading “Is COVID-19 a Defense to Breach of the Oregon Real Estate Sale Agreement?”

Mortgage rates have just dropped to the lowest level in almost 50 years, compelling both homeowners and home buyers to get off the couch to take advantage of record-level savings on their mortgage.

“The average 30-year fixed-rate mortgage hit a record 3.29% this week, the lowest level in its nearly 50-year history,” said Sam Khater, chief economist of mortgage giant Freddie Mac. “Meanwhile, mortgage applications increased 10% last week from one year ago and show no signs of slowing down.”

To put this record rate in perspective, 3.29% even dips below levels seen during the housing crisis. The average 30-year fixed-rate mortgage dropped to 3.31% in 2012. [More: Go to link here.]

The average U.S. rate for a 30-year fixed mortgage dropped to 3.29% this week

Go to link here.

Expects to continue raising rates in near future

July 5, 2018 Kelsey Ramírez

The Federal Open Market Committee released the minutes from its June meeting Thursday, where the committee elected to raise interest rates for the second time in 2018.

The minutes showed the Federal Reserve is not concerned about the rising threat of a trade war or other economic disruptions.

Many economists are predicting disruptions to not only the U.S. economy but also to the world, predicting gross domestic product could drop by 0.1 percentage points in the U.S. and 0.4 percentage points worldwide due to President Donald Trump’s trade war.

And while the Federal Reserve did mention some global economic challenges during its meeting, they were not the focus and did not seem to affect members’ predictions for the future of rate hikes. [MORE: Go to link here.]

A few years ago, before the real estate market got crazy hot (and before we changed the OREF Sale Agreement form), it wa not unusual for a buyer to submit their preapproval letter to their seller, go under contract, and then try to find other lenders who might offer better rates or terms.

But in 2013, TRID [1] was enacted as a part of the government’s response to the 2007/8 Financial Crisis; Dodd Frank, the massive 2010 2,300 page rewrite of financial regulations (containing another 22,000 pages of administrative rules) was created, and the Consumer Finance Protection Agency, or “CFPB”, became its most prominent offspring. Continue reading “Why Oregon Homebuyers Should Shop Their Loans Before Going Under Contract”

The same factors that have affected area real estate for the last few years—limited inventory and an influx of new people to the area—are still in play. According to Business Oregon’s website, which gets its information from the Bureau of Labor, Bend’s current median home price is $404,000 and the median household income is $60,404.

At a real estate forecast breakfast this week, put on by the Central Oregon Association of Realtors, Hayden Homes’ Geoff Harris said that someone earning $60,000 per year is about $140,000 short of being able to afford the median house cost. Molly Brundage, with BrundageSmith real estate, said there’s only one house in Bend that’s currently for sale under $300,000, which is still too expensive for a standard household. [MORE: Go to link here]

Some good news from the latest RMLS™ Market Action letter. New listings for May 2017 reached 4,388, which was 5.9% higher than May 2016, at 4,144. This number doesn’t top the 5,182 new listings for May 2008, but then again, maybe that’s a good thing. For those who remember the Bad Old Days, 2008 was the beginning of the end for the real estate market; it was not until September 2012 that housing prices finally began to increase, after a hiatus of exactly five years, i.e. September 2007 was the apogee for housing prices, before they fell over the Abyss. Continue reading “Analysis Of The Portland Metro Residential Market – May, 2017”