On Market Deal, Buyer Backs Out

[Calvin Schmeling]

I was planning on Wholesaling this on market deal that I had locked in contract. In the contract it states Im buying it as is and attaining tennants. I was completely aware of both. I didn't find out from my agent how long of a lease they were on until a couple of days after signing the agreement. (Thats definitely my fault) But they happen to be on a 3-year lease. And long story short, I wouldn't be able to find out if the tenants would be able to leave the property until after COE. Also, it took the seller about a week in a half of following up to send the leases, and there is nothing in there of leaving early or buying out. Because of how long it takes to get answers I just had a gut feeling I need to back out and I know none of my buyers want to wait out the lease. The agent sent me a cancellation to sign and the buyers refused it. The agent came back to me and said they would keep the EMD which im not worried about, or they can sue for damages after as well. I don't have the time and money to go through a lawsuit right now. I wrote a letter to the seller to try to come to an understanding. But what is the best way to go about it? How I have my LLC structure set up is my Wyoming LLC owns my wholesale company in my state. Would that do anything against a damages lawsuit?

[Jerry W.]

@Calvin Schmeling, too few facts to be able to give much advice. How much EMD did you put down? Have you considered selling toa buy and hold buyer instead of a flipper? It is unusual for a court to force someone to go through with a deal they only award damages if proven. If the lease is still in effect then what is there damages? They have just as much money coming in now as they did a year ago. Maybe had another deal pending they lost their EMD on for not closing, if so make them produce their claims now. It is rarely productive to sue over these things but some folks do. As to your LLC it is likely that any potential damages would come out of that if you have been running it correctly. If it has no assets then there is nothing to get, however it is possible to pierce the corporate veil and go after the owner, but again I have no idea of the facts to guess about it.

[Ryan Seib]

So if I understand correctly, your buyers do not want to back out even though they know about the tenants having a 3 year lease. Just sell it to them then. It is their decision. If they want the EMD that is usually as far as it ever goes normally in Wisconsin, or even just part (ie half) the EMD is usually enough. That said, look at your contract. Unless it says the is not supposed to be under lease I dont see how you are in breach. If you are not legally in the wrong they would be acting foolishly to sue. Of course people do act foolishly. But perhaps you can point that out and negotiate something advantageous to all. Best wishes on this.

[Rebecca Knox]

If the property was rented out, did your agent not include an addendum R which covers this sort of situation? (It has a line in there about seller having to send leases and buyer approve within X days.)

[Marcus Auerbach]

I would not be too worried about a lawsuit; it's costly for the seller too and won't yield much, but you may loose your EMD, or agree to split it at least.

Also, sounds like the seller's forgot to disclose a 3 year lease, which really prevents anyone from using the property for their own purposes, so that's pretty material. Not easy to claim they did not know..

Buying "as-is" in Wisconsin is not as straight forward as it sounds. But I assume you mean you had no inspection contingency in your offer? What other contingencies do you have? I assume you did not make an offer with the intent to wholesale without an escape hatch? The proper way to cancel a deal is to send a Notice of Defect along with a Cancelation and Mutual Release. Your Offer to Purchase contains an exact definition of what a defect is.

If you kill the deal based on a contingency, you should be able to expect the EMD back - however ultimately that is always debatable, meaning if the parties don't agree you have to seek legal help.

On an related note: wholesaling an on market deal is not a winning strategy; you have to assume your buyer also monitors the MLS. You create value as a wholesaler by finding discounted deals that for whatever reason don't want to go on-market. You are not bringing much value when you try to wholesale an on market deal. Cutting into a deal this way will leave a sour taste with both buyer and seller.

[Chris Seveney]

@Calvin Schmeling

I would not worry about getting sued. It is typically too costly.