The Good, Bad, and Ugly

I recently had an investor contact me about a property he was in escrow to purchase and he had some rather interesting news about how he was “maneuvered” by a group that does investing tours. Now, don’t get me wrong, all these guys who do investing tours are not bad, but my take on it has always been – “Don’t buy an investment based on data you are getting from real estate agents who live hundreds of miles away from your purchase area!”

In order to be in real tune with what is going on in a market – you have to be a full time agent in that market. It is equally important that you speak with a full time investment real estate broker if you plan on investing in that market.

Anyways, now that my rant is complete, I will move on with the story. He bought his property in a new subdivision, and was told that he could get Go-Zone and SRAP, making this an unbelievably great deal – which it would have been a great deal. Unbelievably great? Probably not – I am sure I could have gotten him a better ROI, but a good deal nonetheless. The problem is that he was given the run-around, not told what was going on, and then ‘OOPS’ – SRAP is not available to him anymore.

Now, Andries and I told all of our people to close on their lot deeds as soon as possible, time is of the essence, and reinforced that. We had no clue that the MDA would kill off new construction when they did – but we did know the guidelines specifically stated that it was first come first served and you did not want to be at the back of the line. You should have shown ownership prior to December 15th if you really wanted success. Unfortunately, this investor who called me was not told the same thing. He was pushed off because the agent writing the contract was scared they would lose the sale and was hoping to string him along. He was more than prepared to pay more money to close the lot deed to improve his chances of getting SRAP if someone would have told him.

Now, we move to another important issue. The investor states that he was unable to find an Agency Disclosure form anywhere in his documents. This is a required form by Mississippi State Law and is often called a “Working with a Real Estate Broker” form. While the agent who wrote the contract says they have a copy, he is unaware of signing it. This brings a potential licensing issue if there is not a signed one. If there is no agency disclosure form, this investor can file a complaint against the agent, and the agent’s broker for not disclosing agency relationship. This will most likely not help him personally (unless it was later used for suit against the agent), it would show a disciplinary action against the agent and hopefully help someone else from having the same problem.

As for a potential suit against the agent….
What could happen in this scenario, since the agent knew he was trying to obtain SRAP, and the agent did not inform him of his options to move forward, the investor could sue the agent and the agent’s broker. This would typically be covered through their errors and omissions (E&O) insurance and he would most likely win the case for at least his out of pocket expenses (give or take around $15k). It was the agent’s duty to give him information on the program and the steps to take to increase the chances of success. It was the agent’s duty to do this because of the way it was pitched, and not necessarily because of a fiduciary responsibility on part of the agent. That being said, their may have been a fiduciary responsibility under an implied agency relationship, although that is far beyond the realm of this document.

What are the other options?
If he were to walk away from the deal right now, he would be out around $15k, which his only hope of recovery would be by way of lawsuit.
If he were to move forward, complete the construction of the home, and resell it – the numbers look much better. Remember, he did get a good deal on the house. I feel pretty confident that I could at least get a break even on a resell for him although it may offer some slight complications with title seasoning at least for the first few months if it were to sell by way of FHA or VA loan.
Even in a worst case scenario, I doubt he would lose more than a few thousand dollars doing it my way. Then, instead of being out $15k, he would only be out a few $k. He may also be able to get relief from a civil suit against the other agent’s and broker’s E&O for the difference (any money he lost). A number of less than $10k difference would most likely be settled by the insurance carrier than fought because his case is pretty strong.

The ultimate question would be “since SRAP was heavily pitched and he was banking on it for a great investment – could he also get the equivalent of SRAP ($36,500) in a suit against the agent and broker”?
The answer is possibly, but probably not. Also, the time to push that sort of suit would be tiresome and probably not worth the time involvement by the time it was all done with.

Synopsis:
Just build the house, re-list it with me to sell as quickly as possible, and still come out better than walking away.

Tagged as: Bad Agents, Go Zone, SRAP