House to House: Reducing Risk for Real Estate Consumers 

By Gary Isom and Tim Grooms

The underlying function of the Arkansas Real Estate Commission (AREC), a regulatory agency of the state of Arkansas, is to protect members of the public who utilize the brokerage services of the persons to whom we issue real estate licenses. Approximately seventy percent of the persons licensed by this agency are members of the Arkansas Realtors Association (ARA), a trade association in the private sector that supports its members by promoting education, professionalism and ethical conduct. ARA members are accurately referred to as Realtors.

One of the major services that ARA provides is designing and developing the real estate contracts and forms utilized by most real estate licensees in Arkansas. For many years, AREC and ARA have worked closely together. While our processes may differ, we have found that both of our organizations are striving toward the same goal. Just as AREC wants the consumers of Arkansas to have a safe and competent marketplace in which to buy and sell real estate, the members of ARA who have chosen real estate as a lifelong profession and career want all their clients and customers to have a positive experience.

As Executive Director of AREC, hardly a week goes by that I do not communicate with ARA legal counsel, attorney Timothy W. Grooms of Quattlebaum, Grooms, Tull and Burrow PLLC. I’ve asked Tim to join me in the following discussion to address some issues that have surfaced in recent years in the real estate business that closely affect Arkansas consumers.

Question - Gary Isom:
Tim, consumers and real estate practitioners have seen new developments in past years, two of which I’d like to address, as they are somewhat related. The first involves the Termination of Contract form that Realtors and licensees have begun asking buyers and sellers to sign whenever a real estate transaction has failed to successfully close.

The second addresses the increasing number of buyers who are signing offers, often promising earnest money as part of their offer, only to later refuse to deliver the earnest money or writing a “hot” check for the earnest money, and ultimately walking away from their obligation.

First, let’s talk about that unusual lawsuit that shocked both of us and that led ARA to develop the Termination of Contract form that Realtors encourage consumers to sign after a real estate transaction has failed to close.

Answer – Tim Grooms:
Thanks, Gary. 

A few years ago there was a Circuit Court case involving a contract that listed several timeframes, i.e. financing application, inspections and, most importantly, a closing date.  The contract was on the standard ARA form which included a “time is of the essence” provision. 

In law school, you are taught a few “magic” phrases with legal significance.  The “time is of the essence” phrase matches that definition and is supposed to convert all timelines in a contract into “hard” deadlines.  Absent the “time is of the essence” phrase, dates in contracts may be viewed as a “target” and “reasonable compliance” often suffices.  But, perhaps we should all realize Judges are human beings and often are faced with situations where enforcement of the strict letter of the law would be very harsh. 

For example, in the case Gary asks about, an elderly lady entered into a real estate contract and, shortly thereafter, was stricken with cancer and obtained treatment in Houston, Texas.  While undergoing treatment and recovery, all contract deadlines expired by months and the selling firm was unable to contact the buyer. 

The Seller made a decision to put the property back on the market and obtained a contract from “buyer #2” within a short time.  Prior to closing, the elderly lady (“Buyer #1”) returned to Arkansas and called her agent to inquire about closing on “her dream home that she has thought about throughout her ordeal.” 

To cut the story short, an Arkansas judge recognized the hardship of strictly enforcing the “time is of the essence” provision and ordered that Buyer #1 was entitled to close on the property, leaving “Buyer #2” with a damage claim against the Seller and, yes, you guessed it, the listing and selling firms for failure to disclose the existence of the prior contract.

After this decision, ARA strongly encourages a buyer and seller to terminate the contract in writing because, absent:  (i) written termination, or (ii) a Court order terminating a contract, nothing is certain and any seller who chooses to put a property back on the market after a failure by a Buyer to close, faces uncertainty and risk and should not do so without advice from an Arkansas licensed attorney.

Question – Gary Isom:
Thanks for that explanation Tim.

Now, let’s turn our attention to those buyers who are making offers only to walk away, and in some cases disappear, after the seller has accepted their offer. We get the impression that some buyers think that if they refuse to pay the earnest money or write a bogus check for the earnest money, that they somehow have invalidated the contract they entered into with the seller.

Couldn’t there be considerable legal repercussions to a buyer who just walks away from a contract?

I know that you will first want to clarify that earnest money is not required to make an offer, but, we know that some sellers still refuse to consider an offer without earnest money.

Answer – Tim Grooms:
One of the most misunderstood concepts in real estate involves “earnest money” or a “buyer’s deposit.”  Many people mistakenly believe a contract requires a deposit of some sort by the buyer – which is absolutely untrue. 

All contracts require “consideration” to be binding; however, in a real estate contract the consideration is the promise of the seller to convey title at closing in exchange for the promise of the buyer to pay the purchase price.  These mutual promises are adequate consideration to support formation of a contract. 

Payment of a deposit or earnest money is absolutely unnecessary to contract formation.    Earnest money can be an effective tool, if used as “liquidated damages” (legal term for monies the seller is allowed to keep should the buyer default and without having to prove actual damages in a court of law).  However, to be effective, the sum should be a good-faith estimate of the actual damages the seller would incur should the buyer default – which means the earnest money is not valuable if “too little” (i.e. the seller is not compensated fully for the damages incurred) or “too much” (the law will not enforce a liquidated damages clause if the sum to be forfeited would be “punitive” to the buyer). 

Thus, many real estate practitioners have simply abandoned earnest money since it ends up being useless to the seller and, in fact, often creates a problem for the seller and the real estate licensee representing the seller when the buyer will not agree to either accept return or forfeiture of the earnest money when a contract should be legitimately deemed as terminated.  Thus, any buyer who “plays games” with earnest money by tendering a hot check or failing to deliver earnest money faces a contract liability situation identical to that raised by any other default.  

House to House is distributed weekly by the Arkansas REALTORS® Association.  For more information on homeownership in Arkansas, readers may visit
www.ArkansasRealtors.com.