Seller Backed out. Do I just eat the inspections loss?

Question

Hey Forums,

I've been amped up. I'm power-housing knowledge, analyzing deals, making strong connections to people who get things done and I've done it all while deployed with the military for the last 7 months. I thought things were going swimmingly with a multifamily property Duplex (SFH 3/2 with Studio 1/1) all my numbers were showing awesome potential for my first property. So we came to an agreement on the the prices, and started all the normal contracting that I went through with my agent back in Orlando. I put my escrow in and felt like at this point momentum was moving, and should be clear to make it to the table.

I paid for the inspections on the house, and on the septic system, as it was a bit older. These inspections came out to $680 for Inspections and $250 for septic inspections.

So $930 put into inspections, not terrible...but then the unexpected comes along. Hurricane Irma comes along and blows the roofing off the place. Water gets inside, its a mess in one of the rooms. Im a million miles away, and get that fun phone call.

Obviously I can buy conventional loan with the place all torn to sh*t, which I had hoped to do. The sellers say they cannot afford to repair, they will wait for insurance payout, and tell me they will be taking the place off market in the meantime.

!!!! I started getting creative, decided to proposition them for a MASTER LEASE option (Thanks BRANDON TURNER "How I bought my home with low and no money down") Follow me on this one... They contract to sell -ONLY- to me for the next 6 months, I pay/do the renovations (family willing to help, and they are super handy) and then move people in right away instead of waiting months for the place to get fixed, start making cash flow fast! Then I can buy the place comfortably, all the rents are coming to me in the meantime.

Great idea right?! Nope sellers back out and say they don't want to sell anymore, not giving any other reason than they want to wait to repair and assess.

So I'm requesting that they pay for the invoices...i'm not real sure if I can do that, but it doesn't seem like the Seller is held to much. I'm not giving up, back to finding property, but Orlando is rough right now for investment property. Any similar stories, advice or encouragement would be great, I am trying this forum thing out for the first time and figured I could share my story to you.

Semper Fidelis

-Ben

Brian Ploszay · Answer

I liked the analysis given by @Charlie MacPherson

But getting one's money back in any situation takes time and money. The best is to have your attorney craft a demand letter for refund of your inspection costs. They may just give you some money. In my market, savvy investors record their contract, show it shows on the title report. That would force the sellers to keep your contract valid until the insurance money comes through.

Smaller losses like yours are often easiest to walk away. Start looking for an alternative property.

Geoff Andrist · Answer

Ben,

I love your creativity. I bet the sellers are holding off on an insurance review to see what comes of that before they'd consider anything creative. Could be they're concerned about jeopardizing their coverage if they tie or encumber the deed somehow.

You can ask them to pay invoices I bet, but I wouldn't. Let these folks get through that nightmare without adding on. You'll end up getting that money back in another transaction, but once you spend that good will it's really much harder to get back.

Charlie MacPherson · Answer

Account Closed That may be what the seller wants to do, but the language of the contract governs what the parties are allowed to do - if they want to avoid a lawsuit.

Ryan Swan · Answer

@Benjamin DuPont I'm really sorry to hear about this experience, both from your point of view and the seller's. Did you have a formal Florida purchase contract signed with the seller's? If so, I encourage you to read it carefully, as it may already contain verbiage that covers this exact situation.

I give no legal advice for your situation, nor am I a licensed agent in the state of Florida. However, I know the Arizona Association of Realtor's purchase contract has the following section:

"Risk of Loss: If there is any loss or damage to the Premises between the date of Contract acceptance and COE or possession, whichever is earlier, by reason of fire, vandalism, flood, earthquake, or act of God, the risk of loss shall be on the Seller, provided, however, that if the cost of repairing such loss or damage would exceed ten percent (10%) of the purchase price, either Seller or Buyer may elect to cancel the Contract."

Joe Splitrock · Answer

@Benjamin DuPont best I can offer is reassurance that you couldn't have done anything different. This was an act of God, which puts both you and the seller in a bad position. The seller could end up with out-of-pocket expenses to repair. After extensive updates and remodel, the value of the property will likely increase. I can understand them wanting to re-evaluate after everything shakes out. You could sue them for your money in small claims court, but it may not be worth your time and I don't think the courts will agree with you. Natural disasters make the courts more sympathetic and for understandable reasons.

Personally, I would request their phone number, so you can talk to them directly. I would tell them that you are still interested in purchasing their property in the future and you would appreciate first opportunity to negotiate directly with them. Maybe there is an opportunity to do the deal off-market in 6-12 months. You may pay a little more, but the property will probably be improved, so may be worth it.

Either way, I would end this on good terms. This really isn't their fault. It sucks and I am sorry you are going through this. Good luck.

Glenn Treadwell · Answer

Sorry for what has occurred to you Benjamin and I hope that your next property purchase is successful. Perhaps someone can answer: Any way to write off on taxes the cost of inspections, since purchase fell through due to no fault of buyer? Is there any insurance out there for the investor that would cover investors expenses if a seller backs out?

Matt Romano · Answer

WOW, what an insane start to your real estate career man. That is seemingly very discouraging, but its pretty clear that you're keeping your head up, and thats exactly what you need to do. Bigger Pockets is an incredible resource for information, networking, and in this case, encouragement. I believe a lot in philosophy, and as the clique goes "everything happens for a reason". I feel that strongly applies to this situation. Whether its a better opportunity for property, or a hidden reason to why that wouldn't have been best for you in the long-run. Let the search continue, and stay positive throughout the process. Overcoming something like this as a first experience, will make future deals and conditions seem like a walk in the park. Good luck to your REI career ahead @Benjamin DuPont

Charlie MacPherson · Answer

@Benjamin DuPont I am not a lawyer and this is not legal advice. However...

If you had a proper P&S written and it was fully executed, it should have required that the sellers kept the property insured until closing.

It should also stipulate that YOU (not the sellers) have the right to withdraw if there is a loss to the property. If you do not withdraw, it should specify that any insurance payout transfers to you so that you can complete the repairs.

If the loss is uninsured, or exceeds the policy limits, you should have the right to withdraw as the seller cannot deliver the property in the condition in which it was shown and the purchase agreed to within the time frame specified in the P&S.

I'd be inclined to be gracious to someone who has just suffered through a devastating hurricane, but "don't want to sell anymore" isn't a valid reason to cancel the sale.

You can most likely sue for "specific performance", forcing the seller to carry through with the sale - but given the circumstances, kindness and understanding may be the order of the day.

You may want to have an intermediary lay out the facts for the sellers - an attorney, an agent, etc. It will help to keep emotions at bay.

Good luck!

Mark Alpert · Answer

You might have a legal remedy against seller, but that doesn't mean you should pursue it or threaten legal action in this case, for many reasons. I would, however, see if the inspection costs can be covered by their insurance. Make a phone call to seller telling them you think their insurance might cover the loss and that you will be sending a demand letter with the hope and expectation they would forward it to their insurance carrier to cover the loss.

Seller Backed out. Do I just eat the inspections loss?

Seller Backed out. Do I just eat the inspections loss?

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