Seller not approving to disburse earnest money

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Seller not approving to disburse earnest money

Vish Rav
Member since 2018 · 18 posts · 7 votes

Hi BP,

Wanted to get some feedback on this forum. I was in active negotiation with a Seller for a duplex property in Portland, OR. The Seller misrepresented the operating expenses for the duplex during the course of the transaction. After the due diligence period was done, they presented us with new documents contradicting the initial documents for the operating expenses. Basically, the Seller was paying all utilities on the rental property and was claiming that the agreement was for the tenant to pay these expenses. Since I was going to keep the tenant stay on after the transaction, I didn't want to close on a transaction yielding negative cash flow. Hence, I went ahead and terminated the transaction (after trying to negotiate the price down). Now I would like for the Seller to disburse the Earnest monies and also pay me back for my home inspection and appraisal fee. If all of this information was disclosed up front, I wouldn't have offered a selling price above the asking price. 

Earnest money is with escrow and currently in dispute. 

Should I take this to small claims or are there other options? 

Thanks!

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6y

Tell your agent to do their job and get it released.

[email protected]301-893-4635Podcast Guest on Show #192
District Invest Group545 Reviews
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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Vish Rav. I believe you’d have to sue to get it released. The inspection period passed so unless you have another contingency, I believe the seller can keep your money.

    The appraisal and inspection fee is simply your money to eat. It’s the cost of doing business

    4Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 3k+ votes
    6y

    In many states, a disputed earnest money deposit on a contract involving realtors normally gets transferred to the Dept of State or whatever agency oversees real estate licensing. 

    If you were buying direct, with either side having representation, you'll most likely end up in court.

    Your contract of sale will determine if you are entitled to any other costs like an inspection.  Doubt it, but check out the paperwork.

    Good luck.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    6y

    Tell your agent to do their job and get it released.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    13Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    Just to add on: I terminated the transaction prior to the agreed upon closing date.

    0Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    Thanks for the response guys.

    Attached are the contract and disclosures, below are a few key points.

    Line 196 on the disclosures – they did not disclose there was a dispute ongoing with the tenant regarding utilities

    They mis-represented the finances for their own gain to make the property appear more profitable than it really was, they sent additional documents that contradicted the ones they sent us initially AFTER we were through our due diligence contingency and changed their position on who pays what multiple times throughout the transaction

    Line 322 of the purchase and sale agreement ‘if seller fails to complete the transaction in accordance with the material terms of this agreement or any condition which buyer has made an express contingency in this agreement and has not otherwise been waived fails through no fault of buyer, then all earnest money deposits shall promptly be refunded to buyer’

    ***************************************************

    I guess I will see them in court.

    0Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Vish Rav Did you terminate the contract before you released your contingencies? That should make it easier. Each state will have different requirements for releasing EMD. In one transaction I was in, the seller had 30 days before he had to sign the release. He tried to re-negotiate the price while in due diligence because he needed more money. We refused and the guy waited until the last day to release the funds.

    To find your answer, you should start by reading your purchase agreement in detail. If it's not laid out there, your real estate agent or an attorney should be able to answer your questions.

    And by the way, you should ALWAYS assume that sellers of rental properties are over estimating income and under estimating expenses until you verify the exact numbers. 

    0Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    @Andy Mirza - I did not terminate the contract prior to releasing my contingencies since they furnished me with documents that stated the tenants pay the utilities. I assumed that was true and moved forward with the transaction. After the contingency period had lapsed, they furnished my team with more documents that contradicted what they initially provided. I think that is BS. I have in writing from the Sellers agent that even she was mislead by the Seller on these utility charges. 

    I am only terminated the contract when they provided the 2nd set of documents, which were different from what they presented us during the due diligence. 

    I also tried to negotiate the price down with the Seller stating this discrepancy. 

    @Caleb Heimsoth Yeah, I understand inspection is cost of doing business, but I wouldn't have ordered the appraisal if information was disclosed during the diligence period. 

    1Reply
  • Scott Anderson
    Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes
    6y

    I feel like your agent should already be doing their job on this.


    Title should release to you if your agent does their job and show evidence of misrepresentation during inspection.

    BUT it’s also YOUR JOB to check anything given to you During The inspection period.

    So title may tell you to figure it out since you didn’t actually do your due diligence. That’s when others get involved.

    Inspection/appraisal costs are probably gone unless you file suit. 

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    6y

    @Vish Rav when you say that you terminated the contract, did you send some type of release in writing? You are better off to keep the purchase contract valid and negotiate return of escrow to release the contract. That prevents the seller from selling it to someone else, so they are motivated to work through the issue with you. 

    Also for future reference, never use us seller provided financials to run your numbers. You always want to use market rate, because even if the tenant was paying all the utilities, what if they moved out next month? You want to be able to re-rent the same unit for similar rent. To do that, you need to know what market rent is.

    Check with your realtor, but usually disputes over escrow will go to arbitration, so you may not need to sue them. I would even go as far as telling the sellers realtor that I plan to report them for unethical behavior, if they don't help you resolve this. Maybe they didn't know, but they should be putting pressure on the seller to release the money.

    I fear the inspection and appraisal money is lost. You could take them to court, but the time and money involved isn't worth it in my opinion, as long as you get escrow back.

    In my experience most every seller is misrepresenting information or covering up problems. Expect that in every deal and do your own due diligence.

    4Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    Yeah, a lot of lessons learned during this transaction. I should have included more contingencies and kept them all for the entire duration of the transaction. Also, I should have explicitly thought about exit plans if **** hits the fan at any step along the way. Good lessons for future transactions. 

    I will update this thread if I get my escrow back.

    2Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    @Vish Rav I agree with Joe's post. Invoke arbitration if that's in your contract. If there's no arbitration clause, you can file a lawsuit and a lis pendens on the property. That might motivate the seller to return your funds but it may also work against you, if the judge eventually rules you should have discovered the discrepancy during DD.

    5Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Vish Rav. How much is the earnest money?

    0Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y
    Originally posted by @Caleb Heimsoth:

    @Vish Rav. How much is the earnest money?

    $3500

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y
    Originally posted by @Vish Rav:
    Originally posted by @Caleb Heimsoth:

    @Vish Rav. How much is the earnest money?

    $3500

    Suing is really the only solution unless your agent is a great negotiator. The title company is unlikely to release it unless both seller and buyer sign the release 

    0Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    yeah, I'll let you know where I land with all this...

    0Reply
  • Judy Parker
    Rental Property Investor · Closter, NJ · Member since 2015 · 884 posts · 722 votes
    6y

    When The Seller claimed that the Tenants pay the utilities, did Buyer go into the basement, during the Due Diligence period, to confirm number of gas meters, number of electric meters and number of water heaters? That would have indicated who pays what utilities.

    1Reply
  • Sarah Shockley
    Rental Property Investor · Jacksonville, FL · Member since 2012 · 114 posts · 98 votes
    6y

    In my experience this type of dispute would be settled between your agent's broker and the selling agent's broker through an arbitration process. I'm a licensed Realtor in Florida, but I'm not sure what the state-specific regulations would be in this case, though. Are there any licensed Oregon agents/brokers that can weigh in?

    1Reply
  • Vish Rav
    OP
    Member since 2018 · 18 posts · 7 votes
    6y

    @Judy Parker - Here is how crazy this one is. The electricity was metered separately for each unit and I was able to confirm that during the inspection. The water meter was on a single invoice for both duplex and I called the county to verify if there were separate meters, they confirmed there was only one. I was OK with paying water and sewer. There is no gas connections. Garbage and recycling was being paid by the owner, but they misrepresented that to us in the documents. 

    On top of all this, the crazy part was the owner of this property was also paying for internet for the tenant. That was not disclosed in the documents. Who pays for tenants internet? 

    0Reply
  • Account Closed
    Real Estate Broker · Columbus, OH · Member since 2019 · 119 posts · 151 votes
    6y

    If the seller failed to produce the correct financials and you specifically requested them in the contract, that's pretty cut and dry and you should have no problem getting your funds back immediately. In all of my contracts I write that a sale is subject to a review of leases and financials (because it gives you an easy out--and if they fail to furnish a necessary document, there's your out). If you have a clause in your contract like this, there is no question you should get your money back. If you simply asked to see them but didn't put it in writing, it might be tougher than you think to get the funds disbursed back to you. But I agree with the comment above, get on your agent and tell them to fight for you. Good luck!

    2Reply
  • Blake Dailey
    Investor · Ogden, UT · Member since 2018 · 295 posts · 208 votes
    6y

    @Vish Rav I have a very similar situation going on. The seller did not perform and sign on the closing date so my money is still in escrow and I did not take title. I talked to an attorney and what they usually do is write up a letter and send it to the seller essentially to flex their muscles. The attorney will say that the seller did not uphold their end up the contract and if they do not then we will come after them and they will be forced to (if the suite goes in my favor) at their expense. I was working with a transactional agent who was no help at all so hopefully your agent can resolve the EMD issue before it comes to the attorney.

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    @Vish Rav this is where using boilerplate P&S can make things harder. You can always add in a phrase like "seller agrees that any material inaccuracy in provided documentation is ground for withdrawal and return of EMD regardless of contingency dates"

    Most sellers will sign something like that (I’m making the exact phrase up might have attorney do it) as it’s sort of hard to argue you shouldn’t be required to present accurate info. Lots of ways to protect yourself and most realtors won’t do it automatically if there is a standard template in use.

    0Reply
  • Steven Lowe
    Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 votes
    6y

    @Vish Rav sounds like the seller committed fraud. Classic bait and switch.

    0Reply
  • Steven Lowe
    Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 votes
    6y

    @Caleb Heimsoth anything under $15,000 isn't worth filing a lawsuit over. It would probably cost $3,000 just to retain an attorney and discovery could cost three or four times that. He should try to go to small claims court.

    2Reply
  • Jeff Kobernus
    Real Estate Agent · El Dorado Hills · Member since 2018 · 32 posts · 41 votes
    6y

    Things may be different but here in California if there is a dispute of EMD, the property cannot be sold until the dispute is settled.

    In California we have to actually sign off and release contingencies verses an elapsed time making the EMD go hard. As long as there is a dispute over EMD seller cannot sell ( ask your agent.). As far as inspection fees those will not be refunded or paid for unless the seller "buys them from you" to give to the future buyer. This should be a pretty simple fix as this dispute WOULD GO TO THE BROKERS and they would settle. Since you have a very logical reason for terminating the contract (if all is true), I would suspect he would give the EMD back and move on and sell the property to someone else.

    Hope this helps.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y

    I have experienced similar issue with a seller lying but my dispute amount was around 15X your earnest money (it was ~$45K).  I ended up contacting an attorney.  What I was told is that because I had little damages that it was unfortunate that I found the lie prior to closing. If I found the lie after closing, the full cost could have been sought as that would have been my damages due to the fraudulent misrepresentation.  If the sale did not close, my damages were similar to your damages (inspection, some loan costs, I had not sold anything to acquire this RE).  I ended up getting only $9K off the purchase but I could have walked and would have gotten all of my damages.

    In your case your damages are both the earnest money and the costs lost due to the fraudulent misrepresentation.  

    I agree with those that indicate that the RE agent should be handling your problem.  However, when I encountered my issue the RE agent and broker were useless.  They did not even suggest a lawyer to consult or anything.  We never used them again and it is one reason I do not have much RE loyalty (I use who ever first provides the source of the purchase).

    Check if your contract calls for mandatory arbitration.  If so you should get your earnest money and lost costs via arbitration.  If not, a decent lawyer should have no issue collecting your earnest money, your expenses, and his fees.

    Good luck

    1Reply
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