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Good Faith Efforts?

Most sales contracts in use in Georgia require purchasers who must obtain a loan to make a "diligent" or "good faith" effort to obtain that loan. Many of them contain a certain time limit by which a purchaser must make application for a loan and require that the purchaser will pursue the application diligently and take whatever actions the lender requires to make the loan.

Failure to comply with the terms of the contract can result in forfeiture of earnest money and/or payment of damages. When a purchaser makes a "diligent" or "good faith" effort and is unable to obtain a loan, generally the contract entitles the purchaser to a refund of earnest money. Fortunately, in most transactions purchasers comply with this requirement; or the parties reach an amicable settlement of the matter.

The rub for licensees comes when the purchaser is unable to obtain the loan. Often that circumstance results in (1) both parties demanding the earnest money, (2) the seller accusing the purchaser of not making "diligent" or "good faith" effort, and (3) the purchaser contending that he/she did make a "good faith" effort.

What constitutes a "diligent" or "good faith" effort? That probably changes in every transaction. Consider this case in New York. A sales contract provided that the purchaser would use her "best efforts" to obtain a mortgage within sixty days. She promptly made three telephone calls to lenders and submitted one application which a lender denied because the property was not satisfactory collateral.

The purchaser requested the return of her deposit. The seller insisted that she approach several other lenders, but the purchaser had no desire to do so and stopped payment on her deposit check.

The courts ruled that the purchaser had failed to use "best efforts" to obtain a mortgage. Three telephone calls and the submission of one application did not constitute "best efforts" when at least fifty day's remained to obtain a mortgage. The purchaser was required to pay damages of $23,000.00 to the seller.

Who decides whether a "diligent" or "good faith" effort was made? Ultimately, the courts may have to do so. Yet, a broker must often make the initial decision. Consider the situation in which a transaction has failed to close and one party is demanding the earnest money. If the parties are contesting whether the purchaser made a "good faith" effort to obtain a loan, the broker should first attempt to negotiate a mutually acceptable written agreement regarding the disbursal. If that agreement is unattainable but the broker believes a disbursal should occur, the broker should seek legal advice before disbursing any funds.

Sales associates can help avoid the unpleasant necessity of court action by having the parties agree in advance what constitutes a "good faith" effort. For example, when loans are not readily available, the sales associate may have the parties agree in the contract that the purchaser may have to apply to a specific number of lenders for a loan. Similarly, if the purchaser has a history of credit problems, the sales associate can have the parties agree in the contract that several different applications may be necessary to obtain the loan.

The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at . Last reviewed August, 2006.