Duplex Misrepresented, Seller keeping Ernest Money Deposit Check

25 Replies

Question: My husband and I got a "duplex" in Twin Falls, Idaho under contract. We later found out after signing away the earnest money that the house was misrepresented. The egress windows did not meet city code. The sellers said it did, we went back, measured, and found out they were not to code. There would only one exit in case of a fire. The insurance company said we would be liable in the case of a fire. We called the city to verify it wasn't up to code and found out they never pulled permits to build the basement, and the city views it as a single-family dwelling.  We also found out that there is only one heat control, so the bottom apartment has no heat controls. 

We killed the deal and they are saying they are keeping the deposit. Our realtor is hardly representing us and will not go to the seller to ask for it back. Saying we forfitted it. 

It is now listed on the MLS as a single family. With realtor.com you can see the previous listing listed as multifamily.

Here is the listing: 

Do we have a case to ask for it back? 

Thanks, guys! 

Did you find this out after your due diligence period?

Call my SO she is a local Realtor in Twin Falls and can probably help you and advise you on your options within your contract.her name is Aleesha Cochran. She is a great agent and ALWAYS has her clients best interests at the fore front and would happily advise you if she can with no strings attached.

It would depend on the purchase contract....does it address “permits and legal construction”? Most don’t. Also what seller disclosures were supplied/required and did they address this? Did the seller do the work?

Most likely is was your responsibility to discover this during your inspection period. The contract/description was for a “duplex”, not necessarily a “legal duplex”. If the public property records show it as a single family, either you, or even more so, your agent should have caught this before even making an offer.

What do you mean by:

We later found out after signing away the earnest money that the house was misrepresented.

If you've already signed off your various contingencies you may be stuck.  If you explicitly signed something release the EM to the seller, you're certainly stuck.  Pretty much every listing says "information believed to be correct but not guaranteed" or some such.  You have to research this sort of stuff on your own and within the time periods specified in your contract.  I've had more than one phone call with a building or zoning department.  Illegal duplexes like you describe are REALLY common around here.

That said, in some areas its difficult for sellers to keep your EM, even it if seems like they might be entitled.  You could try calling your state licensing board for RE agents and see what they say about the situation.

@Jon Holdman   department of real estate in most if not all states do not get involved with EM disputes.. 

if the EM is at title.. then simply do not sign the release.. money then is stuck until buyer and seller finally agree.

If they never agree the title co. interpleads it to the court for disposition.. then both parties have to hire lawyers to go to court and argue who should get it.. its at that point both parties ( for the average 1 to 2k EM realize legal cost are greater than the money they are squabbling over and agree to split it... that's whats usually happened in my deals.. but like you say if its released to seller.. this is a tough one unless you have disclosures docs signed by seller that are simply untrue and should have easily been known.. problem again is with em the cost to hire attorneys does not justify how much is at risk MOST of the time. 

I agree with several comments above - it was probably your responsibility to investigate the legal status of the basement apartment during your due diligence period.  If you feel like you weren't properly represented, or if you just want a second opinion, you can always have a conversation with your agent's Broker.

@Carly M.

Hi Carly,

If you picked it up during your due diligence period and had an escape clause, then you can back out. If not, then buyer beware. It has happened to most of us who invest. I bought a 3 family that the seller was representing as a four family years ago. The town had no complaints. Years ago, the town comes in and says we have to make the fourth unit legal. $$$s of dollars and headaches later, we were fortunate to have it done.

I think the attorney and the inspector dropped the ball, but ultimately it is the investor who has to perform the due diligence. As Ken Mcelroy says, Trust but Verify.

Read the contract and speak to an attorney

Gino

@Gino Barbaro   out our way we are title co. escrow state not attorney closing states.. so no one basically talks to an attorney in these instances...  if you do they are on the clock and by the hour.. each market different.. in Portland were we are middle of road attorney is 300 to 400 an hour.. its not like closing attorneys that work on a set fee and will look at your docs etc..  Also in many of these contracts out our way there is mandatory mediation clauses.. so you really can't go to attorney anyway unless you just want to blow 300 to 700 bucks having them look at your contract to get your 1k EM back kind of counter productive .. and mediation cost a few grand per person...  So 1 to 5k EM are usually handled through negotiations with the parties.. as a buyer JUST DON"T SIGN THE RELEASE and then negotiate.  Sellers same way don't sign the release.. so at end of the day the baby is usually split down the middle.

@Carly M. Typically your best "escape" clause is the inspection. Your purchase and sale agreement should mention in it that if you are not fully satisfied with the inspection or the buyers lack of wanting to fix inspection items then you are able to back out and get your ED back. However, if as you say, you signed off on your acceptance of the inspection, then yes, it may be too late. It's unfortunate that your agent didn't want to stand up for you and at least fight for you to try to get it back. My wife is an agent and she has never not gotten back an ED, but she would also help her clients understand the inspection and everything else in the agreements, etc. so that she knows that her clients understand everything before signing off on something only to later regret it and for some reason blame her. That's how she builds a name for herself for providing excellent service. Not all agents care enough.

@Jay Hinrichs I didn't mean to contact the state board to resolve the dispute.  Rather, @Carly M. could describe the situation to them, with details not given here (singing away the EM?) and ask what the typical course of action would be.  I recall posts here where folks in CA said it was almost impossible for a seller to keep EM if the deal didn't close, regardless of the details.  I would think that if the buyer found these issues before signing off on the inspection contingency that they could get their money back.  But if the inspection contingency deadline has past without the buyers bringing up this issue, the seller may well be able to keep the money.  If there's a financing contingency still in play, that might a way out.

@Jon Holdman   I hear ya.. however in all my years of being a broker and in 3 states and closing deals in 20 plus states.

real estate department if you called them on a EM deposit issue will simply say its a civil matter.. 

real estate department regulates the agents.. now if the agent misrepresented or stole the EM that's were the DRE comes into play.. or like with all these wholesalers selling property they don't own they will time to time jump in there.

but contractual disputes they will punt.. 

now some states its customary ( south Carolina for one) for the RE brokerage to have a trust account and they handle the EM.. not a closing attorney or title and escrow like west coast.. but again the brokers in those situations unless they really are aggressive are not going to release EM until both parties sign a mutual release with instructions.. 

Anyway  I think the real moral of this tale is you need to as a buyer put on your big boy hat and do your due diligence.. 

and you need to have a really good broker who could pick these things out up front as well.. but you know people now they think agents are worthless and they just do it themselves  LOL...

@Jay Hinrichs

what is the typical down payment? If the down payment is small, then better off walking away?

In NY, the down payments were huge, and there was no option to walk away. Attorney closings do stink, but there are some advantages.

@Gino Barbaro   EM  or Deposit money varies.. but traditionally outside of CA it can be rather modest.. 1k to 5k max.

unless your in a commercial deal or really high priced..   CA it can be up to 10% of purchase price.

as a for instance in Portland these days 1% seems to be about the norm... but I will still get offers on my 450k new construction with 500.00 EM  I always counter.. 

The only time we really use attorneys out here is in larger commercial transactions where its warranted like you want your own reps and warranties addendum...  and they can act in concert with title and escrow.. but end of the day Title companies/escrow  close your transactions and they are all owned by the underwriter.. as opposed to attorney states were a attorney has  ABC attorney closer and is a title agent for FATCO...  we walk into a FATCO office with 15 escrow officers 20 processors and the title department is a separate area.. NO one abstracts title its all done in title plants and many of the title companies have moved them to the Philippines..   But we also don't do utl  liens here.. 

the only time your going to really deal with an attorney is it a major issue and a lawsuit looms.

It's time to go speak with a RE attorney for an intial consultation. You are wasting time until you do.

If you already signed the EM release, you may be SOL. You might have to go after your agent.

Wow, thank you all for your feedback, this is great information. We're newbies and are still learning through mistakes and asking BP. THANK YOU! 

Clarification: we did not sign Ernest Money release.  But it was a few days out of the inspection period. 

In Idaho, the standard has been $1,000 EM Deposit. So it's not a ton of money, but for us starting out $1,000 is a lot. Our Real Estate agent's co has a trust account they hold all the money in, so the seller doesn't have it. She has given us a paper to sign to release the funds, which we are holding off on until asking you all. 

Initially, we were willing to walk away but it seems like our realtor has been representing the seller more than us the whole time, and certainly more now (he's an old realtor pal) so we are leary. We have definitely learned the importance of a good agent!  

Originally posted by @Carly M. :

Wow, thank you all for your feedback, this is great information. We're newbies and are still learning through mistakes and asking BP. THANK YOU! 

Clarification: we did not sign Ernest Money release.  But it was a few days out of the inspection period. 

In Idaho, the standard has been $1,000 EM Deposit. So it's not a ton of money, but for us starting out $1,000 is a lot. Our Real Estate agent's co has a trust account they hold all the money in, so the seller doesn't have it. She has given us a paper to sign to release the funds, which we are holding off on until asking you all. 

Initially, we were willing to walk away but it seems like our realtor has been representing the seller more than us the whole time, and certainly more now (he's an old realtor pal) so we are leary. We have definitely learned the importance of a good agent!  

Refuse to sign the document. They falsely advertised the property as a duplex, supported by the fact they now advertise it as a single family.  Tell them you were unable to get insurance and without insurance, you can't get a mortgage. Most purchase agreements have a financing clause, so closing is subject to financing. Just tell the seller that financing fell through without insurance.

By them relisting as a single family, they are acknowledging that it was incorrectly listed previously as a multifamily. That works to your advantage. 

Most situations like this go to arbitration. In my state, both parties agree to the cost of arbitration, so it costs both parties money. Once the seller realizes they stand to lose more than the $1000, they will likely back down. 

It is true that due diligence is to catch issues, but I have successfully gotten money for issues after closing. When a seller covers up or misrepresents something, an inspection doesn't release them from liability.

@Carly M.   Call that listing agent's broker-in-charge, too! If they see a suit on the horizon, they'll probably tell the agent to release ASAP. 

There are a lot of factors. If you had done this during your DD period, you'd certainly have a case. I'm not familiar with Idaho's state contracts, but many State contract's will have language about unauthorized work and/or misrepresentation of facts that would allow you to submit a case to your Realtor board and they would mediate before needing to send it to court. The escrow agent is step #1, calling all BIC's in charge is #2, calling the Realtor Association that supervises all area agents is #3 and court would be #4. These things vary from state to state, but that would be my course of action. Honestly, a judge might say it was your responsibility to find this out during your DD, but most people want to avoid it getting that far and hopefully one of the above avenues would see fit to just release it and move on.

If there is an earnest money dispute it is quite possible that the Brokers must resolve this between themselves or send it to the state for a declaration as to disbursement.

Originally posted by @John Thedford :

If there is an earnest money dispute it is quite possible that the Brokers must resolve this between themselves or send it to the state for a declaration as to disbursement.

 John out this way they send it to the court with an interpleader but I suspect this will work out..its 1k and now that our bp member has some ammo i suspect there will be a win win... State does not get involved with EM or contracts.. 

they only go after license violations and other things like selling RE without a license or leasing homes without a license or being a unlicensed property manger etc etc

Originally posted by @John Thedford :

If there is an earnest money dispute it is quite possible that the Brokers must resolve this between themselves or send it to the state for a declaration as to disbursement.

 OR if the broker holding the deposit gave it to the seller without the buyer singing a release the state would get into that as a violation by the broker.. for these reasons broker trust funds are a major pain.. send EM to title co.. LOL

First let me say that you have gotten solid advice on here from some very experienced investors and I want to encourage by letting you know that loosing EM happens to a lot of us at some point. 

When I was a still a newbie I put an offer on a duplex and had an inspection period. Well I missed the deadline for the inspection period by a day or two because the home inspector got delayed. When I tried to get some repairs taken care of they refused and I lost my EM. It was around $1000 and it hurt at the time time, but I learned to valuable lessons. First, always keep the earnest money at the title company. Second, pay attention to the details in the contract and always meet the deadline. 

As some others have said...do not sign yet.  Please go to the broker on this.  Yes, it is up to the buyer side to do due diligence.  But, the Listing agent and seller also have a responsibility to accurately represent what they are selling.  Many times you can work it out and a seller will be reasonable.  

I put in all my purchase offers a separate addendum that states the seller agrees to release EM without any further signatures in the event we cancel the contract during the DD period.
We learned this the hard way after having to fight for the deposit on a misrepresented property.

UPDATE: We got our EM deposit back!  THANK YOU ALL! I appreciate all your input and help with this! It absolutely is a great learning experience and I took a lot of great nuggets of information from this. While not fun it's definitely part of the process of learning and we learned a lot.  @Ryan D. - we will be using the addendum idea from now on, love that!  thank you all again, I love this community! 

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