In the madness that is the real estate market of 2021, I must admit it took me a while to realize how many people were "cheating" when writing contracts to buy and sell.
Nah, let's just call it what it is. Lying.
With so many properties drawing five to 15 offers and competition at a level that is hard to describe to a normal, non-real estate industry employed civilian, contract writing has become a topic of much conversation.
Historically speaking, many sellers (and agents) have equated larger down payments with stronger buyers. In other words, with 10 offers on a home, you have to come up with some mechanism for sorting, and down payment size is an easy one.
Larger down payment buyers, the theory goes, have more resources and therefore have better ability to deal with low appraisals and inspection requests that sellers more often than not simply toss in the trash can these days.
A lower down payment buyer (less than 20%), the theory goes, are already pushing all of their chips onto the table just scraping together a 5% or 10% down payment. When they offer $600k for a home and it appraises at $550k, they're dead because they don't have extra resources to bring to the deal. (And in the one-sided rout that is the Denver real estate market of 2020-21, it's highly unlikely a seller is going to lower the contract price when there are nine other contracts stacked up on the kitchen table)
So one interesting "strategy" many agents seem to have adopted is... lie about it.
Section 4 of the Contract to Buy and Sell lays out the grid showing the purchase price, earnest money deposit, loan amount and cash due at closing. The purpose of this paragraph is to show the seller, quickly and concisely, what kind of resources the buyer is bringing to the transaction.
Section 29 of the purchase contract is called the "Good Faith" provision, and it states that buyer and seller agree to work in good faith to honor the terms of the contract and failure to do so shall be grounds for default.
So what happens when a buyer states they have 20% down when they really only have 5% down? Are they breaching good faith?
The answer, as is so often the case in life, is "it depends".
Section 4.5.2 of the purchase contract actually gives the buyer the right to change financing terms, as long as the buyer stays within the same financing type (cash, conventional, FHA, VA, etc) specified in the contract.
So this can be interpreted to allow a buyer pledging a 20% down payment to close with a 5% down payment, assuming the financing type is the same as originally specified in the contract. The gray area here, in my opinion, is could the buyer claiming to have 20% down and attempting to close with just 5% down actually have honored the original down payment commitment in the contract, or not?
Because if that buyer never had 20% down, I think it's arguable (if not obvious) that buyer is not acting in good faith and thus is in default.
As I said at the beginning of this post, I'm late to the party on this because it was only after I began to see buyers claiming to have 20% down on my listings show up at closing with a much smaller down payment amount that the alarm bells went off in my head.
In theory, if the seller believes the buyer has not acted in good faith, that seller could refuse to close, claim the buyer's earnest money and leave the buyer high and dry. Of course, the buyer would then likely sue the seller, who has a good chance of winning in mediation or arbitration unless the buyer can prove he or she intended and was capable of bringing the larger down payment to the closing table.
But at the end of the day it's all a giant fistfight over ethics, integrity, honesty, honor and, of course, good faith.
If lying is part of your contract writing strategy, I would say your desperation is getting the best of you. But if your client legitimately could bring 20% down, but then downsizes to 10% when the appraisal comes in low and then realizes the home needs paint, carpet, siding and a new roof... well, in that case reducing the down payment is understandable and, in fact, logical.
With desperation a key ingredient driving buyers and their agents in a hopeless low-inventory environment, it's increasingly common for misrepresentations to be made intentionally and strategically.
It's one reason why the forms committee is about to release a major re-write of the Colorado Contract to Buy and Sell in 2022 - perhaps the biggest set of revisions to the contract in 20 years.
The contract is going to get longer, it's going to get clearer, it's going to incorporate more penalties and it's going to strip away some of the key ambiguities buyers and their agents have been exploiting to cut to the front of the line in multiple offer situations (which is pretty much everything in Denver that isn't a meth lab).
There are 100 reasons why 2021 has been the most challenging environment I have ever experienced in 27 years as a broker, but having others intentionally misrepresenting buyer qualifications on the purchase contract over and over again is one of the offenses I am most done with.
