I received a frantic call from an inexperienced agent that I mentor on Thursday evening, June 29th. I will call her Nancy. Nancy’s client was an inexperienced buyer, Joe, who had dreams of becoming a real estate investor and was trying to buy his first property. Before every closing, the buyer’s agent should do a final walk-thru with their client, which means one last check on the house before the final signing to ensure the seller has left the property in the condition agreed to in the contract. Their closing was to take place at 9:00 am Friday morning.

On that Thursday evening, when Nancy and Joe arrived for the final walk-thru they found the house a mess, especially the kitchen. They were aware the seller was renting the property but assumed the tenant would be gone before closing. Almost hysterical, Nancy recounted that nothing was packed and the place was filthy. She had called the seller’s agent, Tom, and he hadn’t seemed concerned, saying the tenant could legally stay, according to his lease agreement, until midnight Friday night. He assured her that the seller had told him the tenant was getting out. But, Nancy was having doubts, and with good cause. Nothing in the house indicated an imminent departure. Joe, the buyer, said he wanted out of the deal. Everyone was freaking out.

How could this have been anticipated?

What the seller’s agent and buyer’s agent overlooked when they wrote the Residential Real Estate Sale Contract and had their clients agree to a closing date of June 30th, was the tenant’s lease agreement. The lease was not up until midnight on Friday, but the real estate contract indicated Joe was to close 15 hours earlier. The reality was that as soon as Joe signed the closing documents and the funds were disbursed, he would own the property which included a tenant with which he had no agreement. The tenant’s current lease was with the seller. At the last minute, if the tenant decided he wasn’t leaving, the only recourse that Joe would have would be to go through a formal eviction process that could take months and be very costly. Until that time, the tenant could legally continue to live in Joe’s house.

Over a speaker phone, I got everyone to calm down. I told Joe that he had three choices.

  1.    He could back out on the deal, as he was threatening, but I thought that rather impulsive and there would be consequences. He would most likely lose his $1,000 earnest money deposit, the $375 he’d spent on inspections, the $500 he’d paid the bank for the appraisal, and thirty days of his time. And, there was a remote chance the seller would sue for breach of contract.
  2.    His second option was to believe, Tom, the seller’s agent who still adamantly promised the tenant would be gone and the house cleaned by midnight on Friday. Interesting, because as the seller’s agent, Tom had no legal rights over the tenant either and his conversation with the seller was hearsay. I highly discouraged taking this option, especially because there was no evidence the tenant was even considering moving.
  3.    The third option was to call a halt to the whole process, reschedule the closing for Monday and do a second final walk-thru on Sunday evening hoping the contract conditions were met.

Nancy dreaded the call she would have to make to the seller’s agent to tell him their decision but understood it was her job to protect her client at all costs, and this was certainly the safest option for Joe, but it was going to inconvenience all the participants. Joe would not be able to begin his renovation over the weekend as planned and he would have to cancel his contractors. The real estate agreement would need to be amended by the agents and clients to reflect the new closing date, and both agent’s commission checks would be delayed several days. The title company would need to redo the closing documents because interest and taxes would change with the extended period and Joe would need to get a second cashier’s check for the additional funds needed. Since the house was now closing in July, instead of June, there would be an additional month’s interest added. But, Joe wouldn’t have to make his first mortgage payment until September instead of August, so this part would even out.

There is a happy ending to this story. Joe chose Door #3 as far as options, the tenant did get out, and the seller was able to do the cleaning on Sunday afternoon. The title company got Joe closed on Monday.

Who was to blame for this?

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Inexperience on the buyer’s side caused Nancy to overlook the tenant implications, which probably wouldn’t have happened to an agent who was more experienced in working with investors. It was either inexperience or neglect on the seller’s side. The seller and the seller’s agent should have checked on the tenant and made arrangements at least a week in advance of closing. These are situations that real estate school doesn’t teach and only through experience will an agent become competent. Real estate contracts are puzzles that need to be put together by a tenured Realtor®, and even then, an unforeseen snafu could arise. But, the experienced agent has a much better chance of negotiating an acceptable solution and getting the transaction completed.

Make sure the agent you hire is not only experienced but has experience in the type of real estate you are acquiring or selling. Working with investors and investment properties is a specialty. Good luck.

The opinions expressed in these articles are not necessarily those of Executive Life Magazine or the ACA Business Club. Answers are general in nature and do not apply to actual transactions.