Hard Knock #1

[Rob C.]

My first attempted deal in REI turned into a bust yesterday as the seller failed to perform. I'm hoping to field some advice from the biggerpockets crowd on how to handle this situation. It's a bit of a long post (sorry for that), so I've highlighted the main points for those who like to skim.

It was as an estate sale, and my offer was accepted at the listing price (a figure just high enough for the seller to pay off the loan balance). At some point the estate (sister of the deceased) stopped making payments on the loan, and in turn the bank evidently ran up large amounts of late fees and penalties to the tune of $6000! Suddenly, the seller was short thousands of dollars she couldn't come up with, and couldn't close at our contractual price without lender forgiveness on the fees. Apparently the estate attorney was pushing down to the wire to get the bank to forgive the fees, but when it came time to close ultimately the bank said no. Consequently the seller refused to sell. Now she is planning to put it back on the market at a price that will cover the bank penalties, or otherwise let it go into foreclosure.

I can't help but feel like I got treated unfairly. Yes, I'll get my earnest money back, but between appraisals, inspections, utilities, travel, etc, I've sunk about $2500 into this. Most everyone I talk to says I have the legal right to demand that money be reimbursed by the seller because she defaulted (i.e. there was no contingency of lender approval in the contract). However, I'm not the type that likes to take matters to court. I feel like reasonable people ought to be able to arrive at reasonable compromises without the judicial system. Moreover, while I want to be upset at the seller, I actually have sympathy for her. After all, her sister just passed away, which is a much more painful situation than I am in obviously. And evidently she was just trying to do the right thing in selling off the property rather than let it go into foreclosure in the first place, but she misstepped along the way and found herself at her wit's end trying to make the transaction work.

Is this problem worth exploring creative solutions, or should I just suck it up, and move on to the next one? If anyone has any advice, I'm all ears.

Thanks, Rob

[Jon Holdman]

Originally posted by Rob Condy:

At some point the estate (sister of the deceased) stopped making payments on the loan, and in turn the bank evidently ran up large amounts of late fees and penalties to the tune of $6000!

No, the seller ran up $6000 in late fees and penalties. For whatever reason, the seller stopped paying then note. Were agents involved? Or were you buying directly from the seller? Agents should have kept the seller on track toward closing and advised against such stupid actions as stoping paying the note. If there were not agents involved and you were buying directly, then you should have been the one to bird dog the transaction all the way to closing.

Did your attorney say you have some recourse against the seller? Frankly I think "everyone I talk to" are a bunch of fools who don't understand this business. I've spent money on inspections and dewinterizations on properties only to have the deal fall through. That's part of the business.

That's good. Because, unless there is something that specifically addresses this in the contract, you have no case. Almost all real estate contracts limit the buyer's remedy if the seller fails to perform to return of the earnest money. That's it. Your agent, if you have one, should have advised you against spending so much money before closing. Inspections and even an appraisal should have been maybe $800-900 total, unless this is some really expensive, complex property. If you chose to spend a bunch of money on utilities (really?) or travel, that's your choice.

Pay the extra $6000.

Or, wait them out. If it was a good deal at your price, it is still a good deal at the higher price? If so, someone will pay the extra. Consider the $2,500 tuition to the school of hard knocks and don't do that again. If its not a good deal at the higher price, they will eventually come down. They're falling into the "this is how much we need" trap sellers often do. How much you need from a sale is absolutely irrelevant. The value of the property is the only thing that matters.

If it forecloses, you have a shot at buying it at auction. If the opening bid is too high (frequently the case), the bank will take it back and it will eventually come on the market. Then you have yet another chance to buy it.

Real estate investing is a numbers game. Properties are nothing but dirt and sticks. Sounds like you fell in love and your love made you forget the are thousands of other properties. Move on.