Dallas-Fort Worth Real Estate Investor Club

First of all, if it's a bank owned property, it's an REO, and a short sale is likely not in play.  If it's truly a short sale, the bank will have to be in agreement to allow the sale of the property for a price that will net them something acceptable but still short of what they're owed by their borrower, the current owner of the property.  You would've signed a contract with the owner/seller of the property; not with the bank.  With that said, it sounds like you simply made an offer in the form of a signed contract but that the contract you submitted was never actually accepted/signed by the seller (right?).  If so, your option period never existed, because they never signed/executed the contract you submitted.  If that's the case, in my opinion, if you're finished negotiating with them, you can simply let them know that the offer you've made already is your "highest and best" and request that they promptly sign the contract you originally submitted or send back both your earnest money and option fee checks.  I'm not an attorney or a realtor, but I am an experienced Real Estate Investor, and that's what I would do if I were you.  If they refuse to send back the option fee check, you may want to consider sending them a serious but tactful letter documenting your request via certified mail.

Arthur,

Short sales can be very challenging and the issue of earnest money and option fee are frequently items of contention. To avoid this complication, I insert the following into the Special Provisions of the short sale contract;

All parties understand this is a Short Sale and all terms, conditions, dates and Option Period must have Lienholder’s Consent and Agreement in writing before contract is fully executed.  

The earnest money will be deposited upon Lienholder’s written approval of this offer. Per Short Sale Banking Regulations, homeowner(s) can not receive any compensation for Option Period.

Without written approval from the lienholder the contract is not fully executed and I am not willing to tie up thousands of dollars on multiple short sale offers. When I am on the listing side of a short sale I execute the contract when written approval form the lienholder is obtained. Your post indicates the bank approved the transaction. Did they provide the Approval to Participate letter to the seller or other written approval?

Your situation is a good example of why we should NEVER provide earnest money to a seller. We should always close through a title company and provide the earnest money to the escrow officer. If the deal falls through we submit the Notice of Buyer's Termination of Contract and Release of Earnest Money to the listing agent for signatures. If the seller signs off, the title company will promptly refund the earnest money. If the seller fails to sign the Release of Earnest Money, we send a written demand to the seller. If the seller does not respond to the demand letter within 15 days, the escrow officer at the title company refunds the earnest money. There is good reason for the seller to sign the release as they are liable for three times the amount of earnest money, attorney fees, and all costs of law suit if they "wrongfully fail or refuse". Paragraph 18 ESCROW in the TREC contract provides the specific language for this.

Since you sent the earnest money and option fee directly to the bank, it seems that you are at their mercy. Greg provided good advice that you should seek legal counsel. You may have a good point about earnest money and option fee deposited by the bank.

Please let us all know how this works out so we can all learn from your experience.

Thank you,

Dan Brunner

Realtor/Investor/Consultant

danb@3dmrinc.com