Tricky Buyers and Sneaky Sellers

Buying or selling real estate can be nerve-wracking. Sellers want top dollar. Buyers do not want to overpay. Everyone is interested in the condition of the property. In their effort to get the best possible deal, some buyers and sellers use sharp practices and some downright cheat.

It can be hard to beat a cheater. Dealing with sharp practice is easier, as long as one is vigilant.

Parties to a real estate sale often let down their guard when a form contract is used. They feel a form protects everyone. A form is neutral since it is not drafted by one side or the other. That feeling is reinforced when the form is one commonly used in the local market. Even form contracts can allow sharp practices.

One of the most common sharp practices for a buyer is use of a due diligence clause. A due diligence clause allows a buyer time to check out a property and if the buyer decides the property will not meet the buyer’s needs the buyer can cancel the contract and get back any deposit. Sounds simple enough, so how can that be part of sharp practice?

Most residential form “as is” contracts include a due diligence clause allowing the buyer a certain amount of time within which to cancel and get back any deposit. The buyer does not have to show any reason, just cancel before the due diligence period expires. Here is what some buyers do.

A buyer who wants to tie up property in a hot market can use the “as is” form with due diligence while the buyer looks for something better. Sometimes these buyers will tie up many properties while they decide which one they really want or which is the best deal. The buyer cancels the ones the buyer does not want. The canceled sellers had their property off the market while the buyer decided and, in many cases, thought they had a real sale.

Another tricky use of due diligence is in vacant land contracts. The standard form used locally has a 60-day due diligence period for vacant land unless a shorter time is inserted. A buyer can tie up multiple properties for as long as that time and try to flip property to another buyer. If the buyer is unable to flip for more money or finds a vacant lot the buyer likes more, the buyer can terminate the contract. Often that 60 days extends beyond the scheduled closing date, which means the buyer can back out all the way until closing. 

Using the contract in that fashion creates nothing more than an option. In large land and commercial purchases, buyers often use options but pay the seller a fee for an option to buy on certain terms. The due diligence forms in residential sales do not require any fee to seller when the contract is terminated during the due diligence period.  Drawback to the seller is the property is off the market during the due diligence period. Who knows what happens during that time?

“As Is” contracts are a favorite of some sellers because that means the buyer is buying the property without any right to terminate for unsatisfactory condition after inspection and that the seller has no obligation to repair. A true “as is” contract has no due diligence period, so the buyer is bound without a right to terminate if inspections are unsatisfactory. There is nothing wrong with that.

What does go wrong is when a seller believes using an “as is” contract means the seller does not have to tell the buyer about problems with the property. An “as is” contract does not do that.

In 2018, Florida’s Supreme Court decided Johnson v. Davis. The court ruled that caveat emptor (let the buyer beware) was no longer the law in sale of residential real estate. In its place, sellers would have to disclose to buyers all defects of a property known to the seller which are not readily observable by a buyer and which materially affect the value of the property. Most residential sale forms include that obligation as well. Just because a property is sold “as is” does not excuse a seller from the disclosure obligation.

Most sellers do disclose defects. Many do that with a property disclosure form provided by their Realtor. Those forms are usually many pages long and ask the seller questions to be answered about many aspects of the property. Most sellers complete them as accurately as possible, but rarely does a seller provide a lengthy explanation of any defect. There is not enough space. Sellers do not want to take a lot of time completing those forms either. 

Under the local sale contract forms, if the seller discloses a defect in writing acknowledged by the buyer before the buyer signs the contract, the buyer accepts that defective condition. What goes wrong? Buyers often fail to read the disclosure or do not grasp the importance of a disclosed defect. For example, seller discloses the roof leaks. Buyer later gets an inspection report that says the roof leaks and needs to be replaced. The defect was disclosed. If the buyer read the disclosure and assumed the leak could be patched. Instead, the buyer may have to buy a new roof. 

Failure to read or failure to understand are generally not defenses to a breach of contract claim when a buyer wants out. In this case, neither party was sneaky or tricky, but the buyer has a problem.

Most residential sale contracts provide that if a buyer defaults, the seller’s sole remedy is forfeiting the deposit. That is known as a liquidated damages clause. Liquidated damages are an agreed upon amount of damages when it cannot be determined in advance the exact amount of damages that would result from a breach of contract. 

Some buyers use a liquidated damages clause to create low-cost options by minimizing the amount of deposit under the contract. Since only the deposit is at risk, the buyer can walk with a small penalty. Sellers should make sure the deposit in any contract that limits the seller to forfeiting the deposit if the buyer defaults is big enough to protect the seller. Potential loss of a bigger deposit may also discourage a buyer from default. But, when the deposit is too large, courts will throw the clause out as a penalty and not an effort to agree on damages. There is an upper limit. 

Small deposits can also backfire on a buyer. Some contracts provide that in event of default the buyer is liable for all deposits made and to be made under the contract. A buyer making an initial deposit under a contract with that clause and requiring an additional $100,000 deposit later can be very surprised when the seller demands the additional $100,000 after the buyer fails to close. 

Perhaps the ultimate sneaky seller is one who claims to own property by impersonating the actual owner. Many of these crooks are really good. They have forged driver licenses and passports. Some even have notaries that will vouch for them. They often place property for sale at below market price and buyers fall over themselves in the rush to get a good deal. 

These buyers wire funds for closing and after their deeds are recorded, they can be contacted by the real owner, the FBI, local police and even the newspaper. They find they really own nothing. Many never get their money back. Title insurance may protect their purchase price, but not any appreciation in value or the cost of later litigation. Even the best attorneys cannot guarantee no fraud, but the good ones do a lot to protect and are able to stop most of these fraudulent sales before the buyer’s funds are lost.

There are lots more tricks and sneaks used in residential sales than this column can address.  The reader should understand the importance of getting the best possible professionals to assist with a real estate purchase or sale from start to finish.  Caveat emptor may no longer rule residential sales in Florida, but that does not mean the parties to a real estate sale are free from risks.