Unfortunately, a client of mine who relaxed on their due diligence learned the hard way that some Sellers of investment properties know and plan to beat the system.
What does the “hard way” mean?
(1) timing: it’s a painful pill to swallow to learn mid transaction that there are landmines riddled throughout the property title binder that are all created by and for the seller to remain cozy in their property, not paying their mortgage, with no urgency, leaving you hanging by a thread because your contract helps them play this game of chess, gridlocking everyone so they can forever remain cozy in their dream world that they’ll never have to leave their home, face the truth of their circumstances;
(2) sunk cost: because of the timing of these revelations, you’ll already have invested a significant sum of money on diligence, attorneys fees and more;
(3) future costs: the potential to be earned from the property could be so great that you’re willing to battle it out through the many issues, but you will have additional unexpected and non-traditional costs to bear such as litigation costs, attorney research fees, specialized counsel input, your time and more
(4) no guaranty: you will have no guarantee that your time, money and efforts will lead to you closing the deal
(5) stress and tension: there’s an emotional cost that comes with real estate deals often ignored. When your investment deals are derailed and it feels like the seller is intentionally preventing you from closing, you can expect yourself to feel a whole slew of emotions as a result and we don’t blame you.
So.. what exactly happened in this case? Let’s break it down:
Our client, the buyer, is a seasoned luxury home developer who located a lucrative opportunity. The plan? To transform a foreclosed property, with a seller who still lived there, in Northern New Jersey into a lavish home worth over $6 million. The purchase price was around $1,000,000.
The risk level on this transaction in general was high. The stakes were enormous for the Buyer, with potential losses in money, time, and the deal itself all looming large.
The Crucial Misstep our client failed to acknowledge was underestimating the Seller and the potential trajectories of the Deal from the outset.
What went wrong was, in their eagerness, our client skipped two critical steps – confirming their purchase price was sufficient to cover the the liens on the property and two not evaluating the legal background of the seller in advance of making an offer and drafting the contract. The deal’s price was set without these, and the seller’s background? A complete mystery.
The Unraveling: What was envisioned as a swift 60-day closing spiraled into a year-long nightmare. Our firm was called in mid-crisis, replacing the client’s initial attorney who had failed to navigate these treacherous waters.
The Downward Spiral all began when it was revealed that the agreed purchase price and accumulated liens plus realtor commissions plunged the seller into a financial abyss. Why proceed with a deal that spelled loss? The seller, already teetering on bad faith, now had little reason to honor the agreement.
Pressure and Predicaments: Our client faced a dire choice: hike up the purchase price or entangle themselves in legal battles. Both paths meant bleeding more money than planned, but our client preferred to spend money on the legal end than cover the sellers losses.
Title Terrors: To add to the chaos, title issues emerged, threatening the possibility of no title insurance. A quiet title lawsuit loomed, alongside the dread of acquiring a potentially unsellable property.
The Seller’s Dark Past: Mid-deal investigations unearthed alarming facts. The seller was a habitual bankruptcy filer, entangled in litigation, and burdened with IRS liens. Each revelation was a blow, turning the path to closing into an excruciating uphill battle filled with stress, uncertainty, and lost opportunities.
The painful outcome our client actually experienced:
– Escalating costs far beyond the budget.
– Exhausting time and energy on a deal turning sour.
– The looming threat of losing the deal entirely.
– The nightmare of a seller breach.
– Loss of opportunity to sell the property in more favorable market conditions
So what could our client have done to prevent this? Our office offers a pre-Acquisition Diligence (pre-AD) service to our investor clients. We would have helped them perform a purchase price Feasibility Test to make sure the purchase price being offered wouldn’t put the seller in a position where they could use lack of clear title as an excuse to cancel or not perform and we would have performed a legal background check on the Seller to determine their flight risk and prepare for the contract terms we could add to the custom contract of sale to protect our client with more precision.
Had Pre-AD been conducted, the risk exposure would have been glaringly apparent – a code red situation. A thorough PP feasibility test and an assessment of the seller’s flight risk could have armed our client with the knowledge to negotiate contract terms strategically, significantly mitigating the risks that brutally unfolded.
This case is a stark reminder that any purchaser, regardless of the deal’s structure, cannot afford to overlook PAD. It’s not just a step in the process; it’s your safeguard against a world of legal, financial and emotional turmoil and loss
At Molson Law Firm, we understand that each investment presents unique challenges and opportunities. Our approach is tailored to meet the specific needs of our clients, ensuring that they are equipped with the best legal strategies to protect their interests. We encourage prospective clients to reach out and discuss how we can support your investment goals with robust legal solutions. Contact us today to learn how our expertise can enhance your investment business and let’s discuss how we can can work together on your next deal.
This post is for educational purposes only and does not create an attorney client privilege between the reader and Molson Law Firm, LLC.
