What happens when seller signs multiple contracts? Is that fraud?

Question

Hi Everyone,

I got a 1BD/1BA condo in Downers Grove, Illinois under contract for 15K on 11/4/2015. I put inspection deadline on the 18th and closing date of 25th. (Yippee! My first deal)

A few days after the contract was signed, the seller expressed that she wants to back out of the contract. I managed to talk her out of that idea at the time. About a week into the contract, she said that she has another offer from the past which reappeared and that is significantly higher and she needs to back out of the deal. While I was trying to explain to her we're under contract and I have to protect my investor's interest, she literally "ran" away while yelling "you can sue me but don't chase me". I tried to reach out to her since but she has been avoiding me.

Frankly, I had already mourned the deal and was ready to move on. A few days ago at a local REIA meeting, I learned from a fellow investor that I can get my contract recorded at the county to protect my interest since I spent so much time and effort on this deal. So I went ahead and got that done today (11/25).

While recording my contract, I learned from the county there's another contract also recorded. Buyer #2 has it under contract for 22K. It's accepted 1 day after mine and is set to close on 11/30. I looked up the buyer and it's another investor in the area so I gave him a call. He told me that he already had to deal with another buyer who also had this under contract. Buyer #3 apparently has it at an even higher number and accepted at a later date. Buyer #2 & 3's attorney had already spoke and agreed Buyer #3 will back out since Buyer#2 signed the contract first. I believe (and hope) I got the contract with the earliest acceptance date.

As this is my first deal, I'm not quite sure where I stand.
1. Do I have the right to buy it since my offer was accepted first? Or does Buyer #2 have the right since he recorded his contract at the county before me?
2. Would Buyer #2 be able to close now that my contract is also recorded?
3. Is the seller committing fraud by signing all these contracts at the same time?
4. Any similar experiences / comments / suggestions would be highly appreciated.

I tried to save a few bucks and didn't get an attorney from the get-go on this deal. I understand at this point I ought to be talking to one if I still want proceed with this. Just want to hear any thoughts from the BP community first.

William Hochstedler · Answer

None of this is legal advice, but I'd consider the following:

The way I see it, buyer number 2 has the problem (assuming #3 has already bailed).  Most contracts warrant power of sale and hopefully buyer #2's contract included this.  Therefore, because of your agreement, buyer #2's contract should be void.

I would present your contract to both buyer #2's title company and attorney and suggest that if they close you will give them grief.   If I were buyer #2 in this situation I would either work with you or walk away.  It sounds like you're on that.

If the seller still refuses to sell you the property after you've gotten the other buyers out of the way, look to your contract for remedies for default because that's what she's done. (This has nothing to do with the other buyers.)  Typically you can take an amount equal to the earnest money as liquidated damages, pursue specific damages, or sue for performance.

I doubt fraud (FBI style) would get much traction, because it doesn't sound the like the intent to deceive is there.  She's either crazy or doesn't understand that she can't do what she's done.

My guess is that you won't have much problem with the secondary buyers when they understand what's going on, but be prepared to hire an attorney to deal with the seller (at least to write a scary letter for you).

Good luck.

Wayne Brooks · Answer

@Jay Hinrichs Yeah, I was just thinking about the recorded contract in regard to "clear, insurable" title, now.  You're right though, if I planned on keeping it, buy it, do whatever you wanted with it, and I'd have to assume at some point a judge would declare the recorded contract no longer enforceable, but the other "buyer" likely would have cried uncle by then.

Kenneth Mcgee · Answer

Dealing with a similar situation

Tyron Searight · Answer

what did you decide?

Jimmy Chou · Answer

Hey Everyone,

We have some development on this. So after my last post, I have not been able to reach the seller. However, Redfin emailed me a few weeks ago saying the property is on now the market. The place has been rehabbed, and it turns out Buyer #2 closed on the property disregarding my recorded contract entirely. (How!? His attorney/title company malpractice?) Anyways, the place is now under contract again. I spoke to a few fellow investors in the area and an attorney. I also got to meet Buyer #3 at a REIA meeting and had the funniest conversation of all time about the situation. They suggested for me to have an attorney write a mean letter to Buyer #2. The purpose is to make a fuzz about this and perhaps shake him down for a few grand to walk away with before the property closes again.

Buyer #2 doesn't seem to have a good reputation in the area. He's one of the wholesaler that keeps blasting everyone with bad deals. So I'm getting some moral supports from a few fellow investors to go ahead and "shake him down". If I proceed with the letter, my hard cost/investment on the deal will be $400 ($50 recording fee + $350 attorney fee), potential return around $2K~$5K.  On the other hand, I'm not quite sure if this is how I want to do business (chasing after deals that has gone sour and shaking people down). However, due to the uniqueness of the situation, I feel like I should take it as a learning experience and try to pursue and see what happens.

Please share your thoughts my fellow BP members.

Jeffrey S. Breglio · Answer

Great discussion. Yep. It's fraud as to any contract signed after the first if the others didn't contain a contingency clause (like, this is a back up offer in the event the first falls through).  She represented that she had the legal authority to sell the house to each buyer when she didn't. She would have to raise the defense of mental incompetence. But don't worry about going after her for fraud.

State law would come in as to the "perfecting" of your rights. Most likely the right to buy belongs to the first who signed the contract, not who recorded it with the county, as this isn't a priority of lien situation. But you'll need a local lawyer to confirm.

If you have superior rights and the seller doesn't close with you, you can sue for ALL damages (unless your state has some weird real estate laws). This includes not only out of pocket costs, but the profit you would have made by flipping, wholesaling or renting.

The problem is that it sounds like the seller won't have any money to pay a judgment given the price of the house. So that would probably be a waste of time and money.

The bigger question would be: could you go after the second investor if she sells to the second investor when you have superior rights? I'd say yes. You've put them on notice with recording your contract. If he is somehow able to get the house, I think you'd be able to go after the investor. You'd need, of course, to confirm with a local lawyer. @William Hochstedler and the others have great suggestions on how to proceed. If the profit is there, it's worth your time to get a lawyer to review the documents and write a letter. That's what we're here for! :)

Jeff

Jay Hinrichs · Answer

@Jimmy Chou  got it.. so if you can talk her into it and move into it.. then the other offers are moot.. live there when your ready to move on then turn it into a rental just know you have buggered up title..

Now maybe one of the other buyers can sue for performance that would goof you up as well.

Jimmy Chou · Answer

@Wayne Brooks  Thanks for your thoughts, it's nice to know my thought process is in the similar direction.

@Jd Martin  I actually offered to wholesale the deal right back around to buyer#2 if he's interested. He sounded like he's had enough of this deal though, so he might just walk away from this. (Fingers Crossed)

@Jay Hinrichs  Thanks for your feedback. My exit strategy is to fix & flip. Purchase 15K, Repair 15K and ARV 70K, I'd say it's a decent profit for a deal this size. If it doesn't sell I'm just going to move in there and sit on the equity. However, I'm not sure if the seller would be so cooperative and deed it to me after the other two higher offers dangled in front of her. I'll keep everyone posted if any progress. Love your comment on the fraud issue...lol

Jay Hinrichs · Answer

@Jimmy Chou  Oh on the fraud No its not fraud its more like stupidity

Jay Hinrichs · Answer

@Wayne Brooks  this is interesting.. I suppose someone buying without title insurance can just close on the deal.. and take title subject to these recorded contracts rent it out and given the exteme low value who cars if your title is buggered up..

cost to sue and litigate this exceeds the value I would think...

I could also see a judge removing these contracts... Also depending on your relalionship with a title company they may write around these if your a big enough player.

@Jimmy Chou  interesting ... let us all know how it pan's out does not sound like there is a ton of money in it.. unless your all wholesaler type dudes and the thing is really worth double or triple what you all are in contract for.  So I guess maybe one of you buyers will take a flyer on it and have her deed it too you  and skip title insurance.  I think if you waited out these recorded purchase contracts a few years a title company would write around them if you needed that

What happens when seller signs multiple contracts? Is that fraud?

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