Backing Out of An Unconditional Contract...Can You or Can`t You?

[RedDeerWilliam]

Another email for Barry, Doh! I missed the Legal Docs workshop on Dec 5th! That`ll teach me for not checking MyREINSpace more frequently! Although we did have a blizzard here in Red Deer on the 4th and 5th which likely would`ve precluded me from attending anyway (i.e. terrible road conditions).
I want to take the leap in getting into wholesaling ugly houses to start off my Quickturn career but something that I heard Ron Legrand say at his October bootcamp in Edmonton seemed to go against some of the REIN guidelines about placing written offers and it has left me very conflicted and slightly stressed.

I recall Ron saying at the bootcamp..."Don`t let anyone tell you that you HAVE to buy a house even if you have submitted an offer. The worst thing that you should allow to happen if you can`t find a wholesale buyer by the time you are ready to close the deal, is that you walk away from the deal, lose your good will deposit and have a Seller who is very unhappy with you...."

Yet, my interpretation of what I`ve heard during some of the "Trench" talk at REIN meetings in the last few years was that a potential Buyer (that would be me in this scenario) should NEVER put in an offer without conditions because once any OTP (Offer to Purchase) Agreement goes unconditional, the potential Buyer is now on the hook to complete that deal.

Obviously I`m doing a little `Devil`s Advocate` thinking here. I`m imagining a worst-case scenario where I can`t find a Buyer on a house that I`m attempting to buy and then sell wholesale and I have an offer that is approaching closing. My original offer in this scenario, would`ve either had the conditions already removed or were never there in the first place!

Is Ron correct in saying no one can make me buy that house if I can`t close the deal on an offer I submitted?

The answer to this question will really determine if I`m going to get into wholesaling now or whether I`ll need to delay that option for a few months or even years. I just don`t have the type of financial picture that will allow me to buy a house without either a JV partner, or owner financing. And I`m not wanting to put myself into a situation where I`m forced to sign a "big cheque".

Another set of questions that arise from this scenario...:
If I can`t close on a deal and I do not have the financial means to buy the house I put an offer on, what exactly will happen to me?
...the property?
...the Seller?

I assume that the Seller could sue me if he chose to?
If so, I`d imagine his chances are good that he`d win the case if he wanted to go through the court process, yes?

I screwed up a flip a couple years back that has really hurt my cashflow situation and has made me very gun shy in proceeding with submitting any further offers. One of the main reasons for having this deal go sour was that I couldn`t sell the house in a timely manner.

I need to be able to sleep nights! And leaving me exposed to civil suits, is not somewhere I want to find myself just because I couldn`t find a Buyer and close on a deal!

I suppose I could put in a condition in the offer that says I`ll buy the house (at wholesale) IF I can find a partner. This could buy me some time and possibly better protect me but then during the bootcamp, it was made clear that offers on ugly house wholesaling deals should NEVER have any conditions on them, or I might as well look at rejected offer after rejected offer!

So I am terribly conflicted and am really hoping that Barry or any member out there who has some experience in putting in offers on ugly houses, could shed some light on how to handle this dilemma.

Perhaps if I built a `Potential Buyer`s list ahead of submitting offers that I`d greatly reduce my chances of ever finding myself in this dilemma?! Still I think it`s a good idea to know what my options are if ever I found myself in this situation because even with a Buyer`s list, there is that chance that I may not be able to find a Buyer to buy from me before I close!

Thank you all in advance for any constructive input you can provide on this matter!

 

[cmattric]

Although I am a new in this game, my opinion is:

This is a question I asked to Barry. Answer was,
1. You can offer to buy the house with a condition that you assign the contract without the constent of the buyer in the "additional terms" section.
2. You can say (at the beginning of the contract) your name or "assignee" .


In both situation you have to tell your seller that you might assign the contract to somebody else. That`s why it is though with REOs. If the FSBO seller agrees , then no problem. Otherwise you can always close the deal with no conditions(except the possession date) and sell it to your buyer(this a double cost option).

As Ron says, the worst thing can happen is you loose your deposit, but you don`t wanna do thaaaat.

I think what REIN teaches is also right. Depending on the condition of the house you can ask for an inspection, or satisfactory financing condition. This might limit your negotiations too.

I watch a video on youtube about wholesaling houses, this guy (Username:Localmentor)once told the seller that he can close in 3 days for 50K or in 3 weeks for 55K, seller accepted the first option and he closed on the deal himself, and then found another buyer. Check the videos, good information about wholesale housing.

 

[RedDeerWilliam]

Thanks. I didn`t quite catch your name? Is it Mehmet? Cmattric seems so informal!

REO`s mean again? (Real Estate Offers?) And you were saying "that`s why it`s tough?" (I just needed clarification on that word.)

Of course, assignees! I should`ve rememebered that. I`ve even done that myself before!

I remember that Dan Heon passed along that standard mortgage companies frown upon seeing that term on OTPs as it is a red flag to fraud artists but since in this case, I won`t be applying for financing, it might just be okay to put that on the contract OR in item 1, as you mention, we could put it in the contract as a `Term` NOT a `Condition` which wouldn`t be as threatening, most likely, to the original Seller. I actually prefer the Item 1 option.

See what happens when one gets rusty!? One forgets these things! I`m still eager to find out from Barry what the consequences are should I am not able to find an assignee by the time we are supposed to close the deal and I need to back out.

QUOTE (cmattric @ Dec 8 2009, 01:26 PM) Although I am a new in this game, my opinion is:

This is a question I asked to Barry. Answer was,
1. You can offer to buy the house with a condition that you assign the contract without the constent of the buyer in the "additional terms" section.
2. You can say (at the beginning of the contract) your name or "assignee" .


In both situation you have to tell your seller that you might assign the contract to somebody else. That`s why it is though with REOs. If the FSBO seller agrees , then no problem. Otherwise you can always close the deal with no conditions(except the possession date) and sell it to your buyer(this a double cost option).

As Ron says, the worst thing can happen is you loose your deposit, but you don`t wanna do thaaaat.

I think what REIN teaches is also right. Depending on the condition of the house you can ask for an inspection, or satisfactory financing condition. This might limit your negotiations too.

I watch a video on youtube about wholesaling houses, this guy (Username:Localmentor)once told the seller that he can close in 3 days for 50K or in 3 weeks for 55K, seller accepted the first option and he closed on the deal himself, and then found another buyer. Check the videos, good information about wholesale housing.

 

[RedDeerWilliam]

Any chance you could send me a link to this specific Youtube video? Local Mentor seems to have quite a few videos. Of course he is from south of the border to which always leads to the question how transferrable are his techniques to Canadians?

I agree that REIN is "right". If you`re buying a house to buy-&-hold, you absolutely want to have it inspected before purchase, it would be very costly NOT to!

Thanks yet again.

QUOTE (cmattric @ Dec 8 2009, 01:26 PM) I think what REIN teaches is also right. Depending on the condition of the house you can ask for an inspection, or satisfactory financing condition. This might limit your negotiations too.

I watch a video on youtube about wholesaling houses, this guy (Username:Localmentor)once told the seller that he can close in 3 days for 50K or in 3 weeks for 55K, seller accepted the first option and he closed on the deal himself, and then found another buyer. Check the videos, good information about wholesale housing.

 

[cmattric]

For youtube you`ve got to write is as one word "Localmentor". He`s a Ron`s Graduate. Thing`s that he shows has nothing to do with country. Good stuff. He shows actual junkers on video.

Yes the name is "Mehmet" and there are 3 millions of the same name in Turkey, very common name.

REO is "real estate owned", meaning "bank owned". I write an offer to a REO, and they didn`t quite like the idea of assignable contract. FSBO`s are easier to deal with, and ask for less deposit.

I would use inspection condition for longer peroid of possession date, in case you want to back the deal. Again If I were the seller I`d like to have the cash now rather than later with a conditional contract. I guess thats what Ron`s implied.

Mehmet

 

[BarryMcGuire]

Hi William. January 30, 2010, that`s the date for our Deal-Ready Documents Focus Workshop in, lucky you, Red Deer! That nasty blizzard stopped quite a few people from coming.
Now, on to your question. Despite what Ron says, the basic legal rule in Alberta and, I believe across Canada is that, if you don`t close on an unconditional deal you are responsible for any damages that the seller suffers. In these types of situations the legal cases, (precedents as they are called), say that damages are the difference between the price to you and the price to the next buyer, legal fees, interest payments on mortgage, extra utilities, any monetary item whatsoever that is related to a failure to close. The seller has the legal right to pursue you for the damages. Although that is the sellers legal right, on a very practical basis it seems that many sellers just take the deposit and don`t bother with the lawsuit. Why? Because when they go to see their lawyer about suing the buyer didn`t close, they can`t be guaranteed a victory in court, the lawyer wants substantial legal fees and sellers just don`t want the stress that goes with a lawsuit that might take a year or two to solve with no guarantee of a win.
Hope this helps.



Barry

 

[RedDeerWilliam]

Thank you. Mehmet

 

[BarryMcGuire]

I`m adding another idea. You can try and limit your exposure to full damages in an unconditional real estate purchase contract. The way you do it is to add a clause that says, "the seller`s damages for any breach of the contract including failure to close are limited to the deposit ". The obvious question is, of course, whether you can get a seller to agree to that clause. If you are making an offer to the court on a foreclosure, they will probably never listen to you. Those deals are always sold, "as is, where is" and you have really very little ability to negotiate or add that kind of clause.
You may find a number of opportunities to tell a seller that you will do your best to get something done and you will give them a deposit but that you definitely will not be responsible for damages. It all depends on your negotiating strength.

Cheers

Barry

 

[RedDeerWilliam]

It does help Barry, as always!
As I suspected, the Seller could come after me but as you say, most Sellers just don`t bother because of the cost of the extra time, cost and inconvenience of the legal process.

Of course, I have no intention of renegging on offers that I place, but I figured I better know what I`m getting myself into if I do run into the situation where I can`t find a Buyer come closing! My confidence is a little shakey after my last deal. And anytime I try something new, there are bound to be things I could do better the second time around. Marketing is a real key to being able to find a Buyer, once I have an accepted offer, in wholesaling, especially when just starting out.

Now based on your description of "damages", it may not be a concern if the Seller`s next Buyer, who actually closes the deal, buys at retail since my offers will be at wholesale. But I`d imagine I`d still be on the hook for the legal fees, advertising, interest payments and other ancillary expenses even if the gain in sales prices went beyond these expenses?


January Workshop
Woo-Hoo! Red Deer on the 30th. It`s now on my calendar. Is there someplace I can go to get more details either now or in the next few weeks? I`m wondering where in Red Deer you`re hosting the workshop? Or is that still something you`re working out?!

QUOTE (BarryMcGuire @ Dec 8 2009, 05:17 PM) Hi William. January 30, 2010, that`s the date for our Deal-Ready Documents Focus Workshop in, lucky you, Red Deer! That nasty blizzard stopped quite a few people from coming.
Now, on to your question. Despite what Ron says, the basic legal rule in Alberta and, I believe across Canada is that, if you don`t close on an unconditional deal you are responsible for any damages that the seller suffers. In these types of situations the legal cases, (precedents as they are called), say that damages are the difference between the price to you and the price to the next buyer, legal fees, interest payments on mortgage, extra utilities, any monetary item whatsoever that is related to a failure to close. The seller has the legal right to pursue you for the damages. Although that is the sellers legal right, on a very practical basis it seems that many sellers just take the deposit and don`t bother with the lawsuit. Why? Because when they go to see their lawyer about suing the buyer didn`t close, they can`t be guaranteed a victory in court, the lawyer wants substantial legal fees and sellers just don`t want the stress that goes with a lawsuit that might take a year or two to solve with no guarantee of a win.
Hope this helps.



Barry

 

[Thomas Beyer]

QUOTE (RedDeerWilliam @ Dec 8 2009, 01:02 PM) ..
I recall Ron saying at the bootcamp..."Don`t let anyone tell you that you HAVE to buy a house even if you have submitted an offer. The worst thing that you should allow to happen if you can`t find a wholesale buyer by the time you are ready to close the deal, is that you walk away from the deal, lose your good will deposit and have a Seller who is very unhappy with you...."..
that is true .. to a point .. as the seller could sue you for a lost sale / damages IF (and only if) the contract is poorly worded. Likely the wording in the contract is that the ONLY recourse the seller has is the 1st and 2nd deposit though !

An additional option is to write the offer in a company that has little assets (say a bank account with $100 in it). Then even a lawsuit can at best touch those company assets.

Then there is the question of ethics of course .. but that is another topic altogether !

 

[RedDeerWilliam]

Thank you sir Thomas. I appreciate your words of experience.

As Ron also said at the bootcamp, "I don`t want you doing the legal paperwork on your deals yourself...that`s what lawyers are for!"

So the key item I take from your comments is that I get my lawyer (preferably my corporation`s lawyer, since I`ll be making my offers in the corporation`s name) to make sure that I`m covered and protected with the Offer to Purchase I submit to my potential Seller(s).

And as stated in earlier posts, my intention is certainly NOT to create a reputation as a man who backs out of his deals and leaves Sellers in a bind! Not a reputation I`d like to have!

I am a REIN member largely because I like their ethics and the way they teach and impart information about how to do real estate deals with integrity. I want to use that same level of integrity in the real estate dealings that I do!

QUOTE (ThomasBeyer @ Dec 8 2009, 07:05 PM) that is true .. to a point .. as the seller could sue you for a lost sale / damages IF (and only if) the contract is poorly worded. Likely the wording in the contract is that the ONLY recourse the seller has is the 1st and 2nd deposit though !

An additional option is to write the offer in a company that has little assets (say a bank account with $100 in it). Then even a lawsuit can at best touch those company assets.

Then there is the question of ethics of course .. but that is another topic altogether !

 

[TodorYordanov]

QUOTE (BarryMcGuire @ Dec 8 2009, 07:35 PM) "the seller`s damages for any breach of the contract including failure to close are limited to the deposit ".


I also remember Ron talking about the above clause and it is a must in your offer.

 

[Dan_Eisenhauer]

The Seller could also sue you for "Specific Performance", which is a legal way of saying... CLOSE THE DEAL. You signed it, now buy it.

That happened to me shortly after I got into the business. It cost me $20,000 to settle out of court.

 

[RedDeerWilliam]

Correct Todor,
I believe it is already built into his Offer To Purchase Agreement too!. Thanks.

QUOTE (TodorYordanov @ Dec 8 2009, 08:22 PM) I also remember Ron talking about the above clause and it is a must in your offer.

 

[RedDeerWilliam]

OUCH Dan! That is exactly what I want to avoid especially on my first deal or two or hundred!
...you left such a short and simple post, but it brings up so many more questions about what happened to you in that deal!

• I am assuming of course that this deal-gone-wrong was a wholesaling or flip deal?
• Any words of wisdom on what to do to avoid getting into the situation you did (if you don`t mind sharing!)?
• What went wrong in this deal for you?
• Had you developed a Buyers list?
• Did you buy wrong, or try to sell too high?Did you give yourself enough time to find a Buyer?You have a great learning experience there, I hope you`re willing to share more about it with us?!
  
  Your statementQUOTE (Dan_Eisenhauer @ Dec 10 2009, 03:18 AM) That happened to me shortly after I got into the business. It cost me $20,000 to settle out of court. ...seems to imply that you are still in the wholesaling business. What are you now

• doing to avoid ever

• finding yourself in the same predicament again?!Any other suggestions you can give wholesaling newbies on how to avoid costly lawsuits and avoiding deals not closing?!

Thanks so much for your post and I look forward to your reply to these questions!

QUOTE (Dan_Eisenhauer @ Dec 10 2009, 03:18 AM) The Seller could also sue you for "Specific Performance", which is a legal way of saying... CLOSE THE DEAL. You signed it, now buy it.

That happened to me shortly after I got into the business. It cost me $20,000 to settle out of court.

 

[Thomas Beyer]

QUOTE (Dan_Eisenhauer @ Dec 10 2009, 03:18 AM) The Seller could also sue you for "Specific Performance", which is a legal way of saying... CLOSE THE DEAL. You signed it, now buy it.

That happened to me shortly after I got into the business. It cost me $20,000 to settle out of court.
Depending on contract wording this could have cost you a LOT LESS.

 

[RedDeerWilliam]

That`s my next step. I`m having a meeting with my corporate attorney to discuss the best wording to have in my OTP contracts to avoid having these scary situations from arising!

I`ve got to give Dan credit though. Even though he hit that nasty speed bump, it appears he`s learned from it and kept right on going! Something tells me, his contracts have a few extra "protective" clauses in them now!

QUOTE (ThomasBeyer @ Dec 10 2009, 08:35 PM) Depending on contract wording this could have cost you a LOT LESS.

 

[MarkKruse]

If you are worried about your ability to sell the property on, have you considered buying an Option To Purchase instead? That gives you a window of opportunity to sell the option to a wholesale buyer for a specified price. If you are unable to find that buyer, your loss is the amount you paid for the option but there is no further legal recourse. The option just expires.

Much cleaner and you don`t have to tie up much of your cash for the option.

Just a thought.
Mark

 

[RedDeerWilliam]

Thank you Mark,
I`ll add that to my notes and ask my lawyer about that option as well. Perhaps though an Agreement For Sale might even be better than that?!

QUOTE (MarkKruse @ Dec 13 2009, 02:16 PM) If you are worried about your ability to sell the property on, have you considered buying an Option To Purchase instead? That gives you a window of opportunity to sell the option to a wholesale buyer for a specified price. If you are unable to find that buyer, your loss is the amount you paid for the option but there is no further legal recourse. The option just expires.

Much cleaner and you don`t have to tie up much of your cash for the option.

Just a thought.
Mark

 

[MarkKruse]

QUOTE (RedDeerWilliam @ Dec 13 2009, 07:55 PM) Thank you Mark,
I`ll add that to my notes and ask my lawyer about that option as well. Perhaps though an Agreement For Sale might even be better than that?!
An Agreement For Sale or a Buy-Sell Agreement are methods for taking control or purchasing a property.

An Option serves a very different purpose. It is just an agreement for you to potentially "take control" at an agreed price for an agreed period of time in exchange for the option money. Under the option, you can specify the documents under which the sale will proceed (if option is exercised) or you can work it out later (I like to have it attached to the option).
So...if you find a buyer and exercise your option, you could then theoretically proceed via AFS or Buy-Sell Agreement.

It really depends on the deal, the people and the circumstances you are dealing with.
Mark