Seller cannot close because of lien, what now?

39 Replies

Hi BP.

Tomorrow I was supposed to close on a property, which we are now not going to. During the title search, we discovered a sizable second lien that they didn't disclose. When we mentioned the fact, they acted surprised. Can't say genuine or not.

Today they sent us a release of contract document, stating that they will send me my earnest deposit back. I am sure that they will do that, but I have put some money in for inspections and appraisal. Do you think it's possible to ask the seller for that back?

Anyone has ever had similar experience before?

Originally posted by @Ezra Nugroho :

Hi BP.

Tomorrow I was supposed to close on a property, which we are now not going to. During the title search, we discovered a sizable second lien that they didn't disclose. When we mentioned the fact, they acted surprised. Can't say genuine or not.

Today they sent us a release of contract document, stating that they will send me my earnest deposit back. I am sure that they will do that, but I have put some money in for inspections and appraisal. Do you think it's possible to ask the seller for that back?

Anyone has ever had similar experience before?

Either way the lien has to be addressed -- why can't you attempt to renegotiate the price/offer to include the cost of the lien? Unless the lien is big enough to destroy profit as a flip.... is it possible to close on it as a buy and hold, L/O maybe?

The inspection &  appraisal costs are going to have to be tagged as business expenses. Keep your receipts for tax time. Unless you think its worth it to file suit to force the seller to close... my coin.

Kudos,

Mary   

@Mary B.  thanks for your reply. this property is in a great condition, and it was indeed supposed to be a buy and hold. The second lien is indeed quite large, they owe much more than the purchase pice.

I never actually sue to force settlement. They just don't have the means to cover the liens. If anything, I was thinking of just asking them politely or taking them to small claims. It's not the end of the world, I may loose about $1200 and change. But It's no fun to loose money on a deal that could not be completed.

You cannot force the sale. As standard contracts are subject to the seller providing marketable title if they can't you get your EM back that's its.. and your not entitled to your appraisal fee or others costs associated with the transaction unless you specifically have that worded in your contract which most boiler plate contracts do not have.

Its the cost of doing business and time to move on...

One thing you will learn when you start buying property is the very first thing you do is a prelim title report.. or in states that have abstractors you get title squared away first before anything else this usually cost 200 to 250.. for a prelim or title commitment.. Now I find most mid west or east coast deals they don't do title to the end of the deal. but to me that's *** backwards.. as it creates this exact situation. ON the west coast as you know when you send your EM to title company and open escrow you will have a prelim in a matter of days.. you review that if there are issues you work on them but you don't incur further costs until those items are addressed.

No, you won't be able to get the up front costs you've spent from the sellers.  That's part of the cost of being in this business.

Agree with Jay, it's crazy to wait til the last minute to do a title search.  Here it takes about 5 minutes for me to look it up any recorded liens online, so it's done before any offer is submitted.

Originally posted by @Ezra Nugroho :

Hi BP.

Tomorrow I was supposed to close on a property, which we are now not going to. During the title search, we discovered a sizable second lien that they didn't disclose. When we mentioned the fact, they acted surprised. Can't say genuine or not.

Today they sent us a release of contract document, stating that they will send me my earnest deposit back. I am sure that they will do that, but I have put some money in for inspections and appraisal. Do you think it's possible to ask the seller for that back?

Anyone has ever had similar experience before?

 Yes, that was a significant matter not disclosed in accepting the offer. They should have known. They probably did know but 1. thought it was forgotten (if they had not been paying it) and 2. thought that it was less and that it could be paid. You incurred the additional expenses arising from their negligence, so absolutely they pay for it. Seller's default all the time and pay such costs. It's also on the listing agent, they should have known as well, to some degree as they should have checked for liens prior to accepting contracts presenting them to their seller. How can the listing agent represent the seller's interests if they aren't aware of the amounts necessary to close? They can't.

Now, if you want the place you could consider, as in could not should, reducing the price and taking it subject to the lien, you could close on that amount with the docs you have.....unless you are borrowing, a lender won't go there.   

@Wayne Brooks  

  As a newbie RE agent at 18  ... way back in the olden days.. My very first listing.. I had came up to the final week and the title was finally run and it could not close because of lien issues.. Don't remember exactly what it was.. But from that day on. The first thing I did when I got a listing was to open a title order with purchase sale to follow.. I wanted to know there were no issues to closing and spend money and time marketing someone's property who is not in a potion to close.  I have been doing business the last year in Charleston and I have 3 properties in escrow now that have been in escrow for going on 6 to 8 months while they try to clear up the title issues. I have not spent any money on them except for the 225 bucks on abstractor. When title comes through we will do the rest of the due diligence in the mean time we have control of the asset and can close on it if we choose.

@Bill Gulley  

  Average RE agent just lists and sells and gets blind sided just like the buyer in this case.. And much of this has to do with what is traditional in the market place regarding escrow flow...  Like I said because our WEst Coast title plants are basically some of the best and efficient in the country we routinly get title commitment ( we call it a prelim title report) with 48 to 72 hours of opening escrow... Where when I do transactions in abstractor states it can be a couple weeks before title comes back to the attorney and you have to specifically ask for a title commitment in writing it is just not automatic like it is here on the West coast.. So when you open an order on the West coast you get your prelim and a copy is sent to the buyer the seller the listing broker the selling broker and the lender if so disclosed at the time you opened escrow.

Some brokers will be proactive like Wayne mentioned and how I use to conduct my sales years ago... But no way is the seller responsible for the appraisal fee and or other costs associated with a sale fail unless it was specifically out lined in the contract.

If this lien is more than the house is worth why don't you try to do a short sale on it?

Hire a 3rd party negotiator that only gets paid at closing once they get approval.

You'll have to keep the EMD tied up until it happens or you determine it isn't worth it anymore, but that is the way to try to not waste the money you have in it already.

To echo others check title as pretty much the first thing.  I have my attorney do a fast search either before I offer or before I accept a counter (as my offers usually suck:) ) and certainly before I lay out any other money on things.  She does it for free since I give them a lot of work, and I will get charged for title work on anything that does close.

Hi all,

Thanks for the replies. I am in the West Coast, and I did assume that the title would have been clean. The listing agent is an older gentleman and does seemed experienced. But you'd never know what actually happened. The property was in the market for a long time because they had it at a much higher price. Not sure if the second lien was created after it was listed. 

But we should know now, get a prelim check before submitting an offer.

Has nothing to do with a title plant or time to obtain an abstract, it's an expense incurred due to seller's negligence in a representation to sell at an agreed price, tortuous conduct and while sale contracts generally don't spell out such damages, doesn't mean they are not obtained in small claims or courts. I sign the agreement to sell, I should have know I couldn't sell at that price, my buyer incurred expenses due to my not knowing, I owe the buyer. Pretty simple. :)

Who owns the first mortgage note??

You could try to buy that for cash at a discount if it's a smaller bank and then foreclosure to wipe out the junior lienholder.

Are you trying to get a loan or pay all cash? Liens can get placed on the properties at any time. Title might have been clear at the time you put under contract. Good luck getting money from the seller as likely they will tell you to pound sand.

No legal advice

My agent went over the purchase agreement and informed me about a clause that addresses the issue around 'seller not able to provide good and marketable title that is insurable by a reputable title insurance'. In witch, the seller agreed 'to reimburse the buyer any costs incurred for inspections or certifications obtained according to this agreement'

I think we have some ammo to get my costs back!

Lesson 1: Do a prelim title search.

Lesson 2: Make sure the purchase agreements have adequate default clauses. 

It always help to read your contract, instead of speculating.

Originally posted by @Jay Hinrichs:

The first thing I did when I got a listing was to open a title order with purchase sale to follow.. I wanted to know there were no issues to closing and spend money and time marketing someone's property who is not in a potion to close.  

 That's a great tip, Jay. 

@Bill Gulley  

I agree with you.  Back when I was a broker, the very first thing we did after we got a listing was do a preliminary title report.  No one waited until escrow was opened.  Here's a good reason why.  I think both the seller and the agent and his broker have some responsibility here.  I'd definitely want my money to be reimbursed or I'd sue them all.

Originally posted by @Jon Holdman :

No, you won't be able to get the up front costs you've spent from the sellers.  That's part of the cost of being in this business.

I want to second Jon on this. This topic comes up frequently here  on BP when deals fall out of escrow.  You can get and will get your EM back, as soon as escrow receives the signed cancellation from both of you and the seller .  But money you spent on inspections and appraisals cannot be easily recouped from the seller.  You can try to strong arm or guilt them.  But you are not owed any due diligence money.  That is money you spent at our own risk.

Originally posted by @Ezra Nugroho :

My agent went over the purchase agreement and informed me about a clause that addresses the issue around 'seller not able to provide good and marketable title that is insurable by a reputable title insurance'. In witch, the seller agreed 'to reimburse the buyer any costs incurred for inspections or certifications obtained according to this agreement'

I think we have some ammo to get my costs back!

Lesson 1: Do a prelim title search.

Lesson 2: Make sure the purchase agreements have adequate default clauses. 

Please keep us posted how you work this out.  I've never seen anyone get inspection costs reimbursed for failure to provide good and marketable title due to lien issues.  The seller can provide good and marketable title.....with an encumbering lien. There is no title flaw here.  Rather there is money owed that neither you or the seller is willing to pay. Again, please keep us posted how you work it out.  I think you maybe able to strong arm the seller to reimburse you.  I'm not sure I judge would agree.

Originally posted by @Bill Gulley :

Has nothing to do with a title plant or time to obtain an abstract, it's an expense incurred due to seller's negligence in a representation to sell at an agreed price, tortuous conduct and while sale contracts generally don't spell out such damages, doesn't mean they are not obtained in small claims or courts. I sign the agreement to sell, I should have know I couldn't sell at that price, my buyer incurred expenses due to my not knowing, I owe the buyer. Pretty simple. :)

I've never seen anybody go all the way and win one of these reimbursements of DD money in small claims.  Have you?  The seller's actual negligence is questionable as negligence suggests a known defect or one the average seller would know and understand.  There are so many counter claims to negligence. 

  

Kristine Marie Poe 

I don't think this is "marketable title".  But if this is marketable title, then it would seem to me that the seller is required to sell the property on the terms he and the buyer agreed to, and if he is unable to do that, then he could be sued for specific performance.  If I were a seller I would think returning the buyers costs would certainly be cheaper than defending a specific performance suit.  Like I said, I don't think the title here is marketable.

As far as negligence goes, this was referred to as a "sizable" lien. It stretches the imagination to think a seller would not be aware of a "sizable" lien. And if he were aware, then don't we start to approach negligence. Then there is the agent. Wasn't he responsible to determine whether the property could be sold before he put it in the MLS? In the old days we would pull a preliminary title report before the listing appointment.

This seller is ready to close.  All the buyer has to do is comply with the terms of the agreement.

Originally posted by @Jim Piper :

  

@K. Marie Poe 

I don't think this is "marketable title".  But if this is marketable title, then it would seem to me that the seller is required to sell the property on the terms he and the buyer agreed to, and if he is unable to do that, then he could be sued for specific performance.  If I were a seller I would think returning the buyers costs would certainly be cheaper than defending a specific performance suit.  Like I said, I don't think the title here is marketable.

As far as negligence goes, this was referred to as a "sizable" lien. It stretches the imagination to think a seller would not be aware of a "sizable" lien. And if he were aware, then don't we start to approach negligence. Then there is the agent. Wasn't he responsible to determine whether the property could be sold before he put it in the MLS? In the old days we would pull a preliminary title report before the listing appointment.

This seller is ready to close.  All the buyer has to do is comply with the terms of the agreement.

Agreed that if sued, the sellers (and buyers) come out ahead (cheaper, faster) by settling the fees the buyer wants reimbursed..  Agreed that a prelim should make all parties aware of a "sizable lien", including the agent.  That being said, I've never seen an agent made responsible for lack of marketable title or expenses incurred by a buyer due to lack of marketable title. I've seen lots of major liens show up the day before (or of) closing.  Haven't you?  A prelim is not the final policy.  Where I am, escrow sends out and receives the statements of information back from the sellers as part of the escrow package.  They receive that info AFTER they issue the prelim. Once they have SS numbers, spouse and address info, there's always a chance that there will be more.  That's when I get the call.  I've dealt with some mighty big liens and title issues that the sellers or heirs or admin/execs truly had no knowledge of.   

Hopefully the OP will prevail in his attempt to get the seller to reimburse his DD funds.  If he has to litigate, I'm not convinced that he would prevail.

Use that lien as a negociating tool and seal the deal.   If their is still a deal to be done then do it.   On the deals to come what you do first and foremost is run a title search and secure some title insurance.  This could have been addresses up front and negociated.  

I think the way it is, the title is not really marketable because the total liens are quite a bit larger than the purchase price, and they don't have enough to cover the difference.

We don't know for sure how the second lien came about. I heard that it had to do with some loan modification that they did. We've got no details.

I will keep you guys posted.

Originally posted by @Account Closed :
Originally posted by @Bill G.:

Has nothing to do with a title plant or time to obtain an abstract, it's an expense incurred due to seller's negligence in a representation to sell at an agreed price, tortuous conduct and while sale contracts generally don't spell out such damages, doesn't mean they are not obtained in small claims or courts. I sign the agreement to sell, I should have know I couldn't sell at that price, my buyer incurred expenses due to my not knowing, I owe the buyer. Pretty simple. :)

I've never seen anybody go all the way and win one of these reimbursements of DD money in small claims.  Have you?  The seller's actual negligence is questionable as negligence suggests a known defect or one the average seller would know and understand.  There are so many counter claims to negligence. 

Have I seen this happen? Yes, several times, especially in commercial when costs can be in the tens of thousands of dollars. I can't understand how you can't see that some airhead seller has no clue as to some significant amount required to provide good title and agree to sell at a lower price than what would be necessary.

An agent in our office got tagged for costs spent by a buyer in this exact type of thing, she listed a property at a price insufficient to provide good title and failed to inform the seller of amounts they would need to pay to give good title. Because of her misstep in lack of due diligence, the seller also had a claim against her. The writing was on the wall, it didn't get to court, she just paid it.

I have been personally involved in business sales with RE that were more involved where what was originally agreed to couldn't be met as originally thought, at the fault of buyers and sellers and I'd have to hold things together instead of having one party sue another, adjustments to price usually cure the problem. I'm not talking about little bumps in the road that just become points of negotiation, I mean something where one business type guy thought they were being clever and were caught that were cause for legal actions. Only had a couple residential sellers that needed to be "corrected" before they got into hot water.   

When you have situations where you have a claim against a seller (a clear matter of default) you can sue and usually court costs and attorney fees go to the prevailing party, so if you know you have a slam dunk case, it won't cost you anything to go there.....if the seller has means. It can cost you initially, and judgments do go uncollected, so pick your battles. And, brining in the agent into such matters, that judgment will be paid by the broker or errors and omissions insurance coverage, or from a bond, as brokerages are required to provide such financial assurances.

I'm going to add too, the general public only hears of such matters through the grapevine, usually started in the circles of the buyer or seller, agents involved as well as their broker will try to keep issues close to the vest, quiet, attorneys certainly don't talk about it. These complaints are often settled out of court with the threat of legal action. So, I'm not surprised at all that you have never heard of such things unless you were directly involved.  

If I were to guess, I'd say there are probably a dozen cases here in town each year where some agent messes up and to save face or to indemnify their client or another party from some issue. Buyers and listing agents get into all kinds of issues where they fail in their duties, they recognize the matter and take care of it. I know, personally, a half dozen agents who messed up, got frustrated and quit the business, I'm sure there are many more. :)    

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