The Devil is in the Details

The Devil is in the Details - The Importance of Being Detailed in Real Estate Transactions

In the fast-paced world of real estate, precise contract language is critical. A recent case vividly underscores this point. In this instance, a property changed hands three times in quick succession, highlighting how even small oversights can lead to significant complications.

Here's what happened: 

The original seller sold their property to a wholesaler. This initial closing included a contract clause for a post-closing occupancy holdback. The holdback stipulated that $10,000 would be withheld and released only if the seller vacated the property within 21 days. Although the clause was well-intentioned, the buyer's intent was for the seller and all personal property to be removed within that time frame, but the contract language did not explicitly state this.

In rapid succession, the wholesaler sold the property to a second wholesaler, who then resold it to a third buyer. The common practice in such scenarios is to include the original holdback language in all subsequent contracts. However, in this case, the second buyer's contract omitted this crucial language, while the third buyer's contract included a different version of it.

The first two closings were handled by one title company, and the third by another. This is important because the error might have been caught if the closer saw the escrow language in the third contract.

The closer of the initial transaction missed the specific holdback verbiage and did not add it to the settlement statement. When she sent out the settlement statements for review, none of the parties involved reviewed them for accuracy, so the error was not caught, and the escrow was not collected. Ultimately, the seller vacated within the stipulated 21 days but left personal property behind, assuming they were compliant with the contract terms.

Although the seller was correct according to the language of the contract, that was not the intent according to the buyer of the first and the buyers of all successive contracts. The second wholesaler, now the ultimate seller in this chain, owed $10,000 to the end buyer, whose contract explicitly stated that all personal property would be removed when the seller vacated within 21 days, or the buyer would be entitled to $10,000.

What ended up happening?

Since the escrow in the original contract was not collected at closing, the title company, at the request of the Leg B wholesaler who mistakenly believed the post-closing occupancy clause was in their contract, reached out to the seller to collect the funds. The seller refused, correctly pointing out that the agreement required her to vacate and did not involve any personal property left behind. Meanwhile, the ultimate purchaser was demanding their $10,000, creating a dispute among all parties involved in each of the contracts.

Ultimately, the seller refused to provide the funds, and the Leg B buyer threatened to sue the original wholesaler, leading to threats against the title company from all sides. Once the irregularities came to light, it was determined that the title company, the original wholesaler, and the Leg B wholesaler were all at fault. They collectively agreed to pay $10,000 to the end buyer.

This situation became a perfect storm of errors.

• The holdback language was not included in all three contracts, and the two contracts with the language had differing versions.
• The contract language in the first contract did not clearly tie the personal property removal to the escrowed funds.
• Different title companies handled the transactions, making it harder to catch the original error.
• None of the involved parties on the initial two legs of the transactions reviewed their settlement statements for accuracy.

The devil is in the details, as they say, and this case illustrates how important it is to be meticulous. When drafting contracts, especially in multi-step transactions, it's crucial to ensure that all terms and conditions are consistently and accurately included in every contract iteration.

Additionally, all parties must meticulously review settlement statements to confirm that all numbers and terms align with their expectations and agreements.

Real estate investors can learn valuable lessons from this case: always double-check your contracts and settlement statements, communicate your intentions clearly, and ensure all necessary provisions are carried through each stage of the transaction. This diligence can prevent costly misunderstandings and protect all parties involved in a real estate deal.