A Buyer's Nightmare When Deal
On a Duplex Goes Horribly Wrong

What recourse does a buyer have when the duplex he had a contract on turns out to have hidden horrors but the sellers refuse to return the earnest money?

Question: I am first time home-buyer in Los Angles who placed an offer on a duplex. When I initially saw the home, I was not able to see it entirely because half the duplex was still occupied by a tenant. I put down a $10,000 deposit based on (a) seeing the rooms I was unable to see and (b) having my own contractor view the property to give me an accurate assessment of how much money it would take to rehab the home. It must be said that it was obvious that half the duplex needed considerable work, but I was assured that all the work was cosmetic.

My agent, the listing agent, the inspector, my contractor and I were all in attendance (when we finally had the inspection). I found that day that there was no heating system in the house. There were vents and thermostats, but they were not functional. Apparently, there had been a heating unit in place at some point, but it had been removed. I also found out that there was asbestos in the ceiling, which is normally not a big problem. But the ceiling was falling down in chunks and needed to be repaired. Therefore, I would have to have the asbestos removed. The inspector found several other things wrong with the property, but those were the two biggest problems. My contractor also told me that it would cost a minimum of $100,000 to satisfactorily rehab the house.

I was told by the listing agent that the sellers were not responsible for the heat and that removing asbestos was not necessary and if I really wanted it removed, it would only cost a few hundred bucks. At that point, I decided to back out of the deal. I sent the escrow company a letter on saying that I was canceling the sale.

To make a long story a little less long, I received a letter from a law office stating that the owners were keeping the deposit because I did not do things within the time allowed and that they entered the contract in good faith and I breached the contract. I just recently found out that my agent never gave them a request for repairs in writing.

What do I do? Ten thousand dollars is a lot of money to walk away from. I was assured over and over again by my agent that I could walk away from the deal if there was something glaringly wrong with the house. How can I get my money back and who is responsible?

Answer: Wow! What a mess you've gotten yourself into. Fortunately, you are not without remedies.

Seems to me you should be able to back out of the contract cleanly. Assuming your offer was contingent on a satisfactory inspection, you should be able to cancel the deal because of the problems that were found. Big or small, it is your call as the buyer as to whether you want to proceed with the sale if defects are discovered.

Based on what you say, the inspection occurred within the time frame allotted in the contract. It may have taken place at the last minute, but it did meet the requirements of the contract. The key here is the wording of the contract: Did it require that just the inspection be completed with a certain period, or did it require that the inspection be done and your decision regarding the inspection must be made within a certain number of days? I suspect the former, that only the inspection take place. And if I am correct, it appears that you met the contract's requirements.

That said, it seems your agent dropped the ball in not relaying your demands to make the necessary repairs or lower their price in a timely manner. Despite instructions from you and his brokers, he did not convey your counteroffer. And as a result, the sellers now say you failed to comply with your end of the deal, so they intend to keep your deposit.

Also, based on your e-mail, I wonder if your agent did not extend the period in which you were required to complete the inspection each time the listing agent cancelled an appointment with you and your contractor? If he didn't, I say he was negligent. I doubt very much that the contract specified who would make the inspection, a contractor or independent home inspector, or limited the number of professionals making the inspection. Consequently, you were prevented by the listing agent from examining the property on three different occasions. Each time, the inspection contingency should have been changed to reflect that.

You have several avenues for redress. First, you can take your grievance back to the agent's brokers, who are ultimately responsible for his failures. Real estate professionals carry errors and omissions insurance just to protect themselves in situations such as this.

If you get no satisfaction there, your next step is to take your case to the local Realtors association. Many have committees which try to settle disputes between their members and their members' clients.

If you still are not happy, complain to the agency in your state which licenses real estate agents and brokers. In your case, it's the Department of Real Estate in Sacramento. For readers in other states, you can find a list of regulators in the consumer section of the Association of Real Estate License Law Officials web site (www.arello.com). Most of these agencies have mechanisms in place for handling complaints like yours, and many have funds available to compensate people who have been wronged. And lastly, you can hire an attorney (one which specializes in real estate, please) and take your case to court.

Finally, so other buyers don't find themselves in the same boat, let me address what I see as two major mistakes that you made.

First, get everything in writing. Never, ever take anyone's word for anything. Your money is on the line, so get it down on paper. Insist upon it, even if the agent or broker or buyer or seller says it isn't necessary. As we can plainly see from your situation, it sometimes is. So it's better to be safe than sorry.

Second, it seems to me that you put way too much earnest money on the table. Sometimes it is necessary to make a large deposit to indicate to the seller that you are a serious buyer. And in hot markets, when houses are flying off the shelves, it might help to attach a large check to your contract offer so it stands out against rival offers. But normally, only few hundred dollars should suffice. In most cases, you'll get your money back if the deal caves and the parties agree to disagree. But if the disagreement turns into a dogfight, your deposit money is in play and you could lose it.

Feedback

As an owner of a small mortgage brokerage, I have to take exception with a statement in your recent article as it is not accurate. You wrote, "Unfortunately, most of the kind of skullduggery you describe is committed by mortgage brokers."

While I agree with your characterization of predatory lending, it is not limited to brokers, nor is it brokers who are primarily engaging in such practices. One need only look at the recent law suits against Household Finance and Ameriquest Mortgage, both major subprime lenders, to know that bankers share just as much responsibility for these types of practices.

Mortgage brokers seem to be the patsies for all the bad lending practices that occur in the marketplace. One reason is because we are small business owners without the propaganda machines and legal counsels of the big banks who repeatedly get away with blaming the little guy. While we do account for over 60% of originations in this country, that does not translate into our being the majority violators. Anyways, I agree with the rest of what you wrote, but I still wanted to set the record straight. Steve.

Response: You are right, and I apologize. I was just a little too glib. But the fact is that the suit -- and subsequent settlement -- with Household Finance is old news, and the more recent suit and settlement with Ameriquest Mortgage, while huge both in dollar amount and ramification, had to do at least in some instances with practices that the company stopped some time ago. These and other major lenders have drastically cleaned up their acts. But rouge brokers have not. And when they are found out in one jurisdiction, they simply pull up stakes and head elsewhere. The big guys, on the other hand, have nowhere to hide.

That said, every borrower, no matter who he or she is dealing with, should be extremely careful by, among other things, avoiding deals that seem too good to be true; not signing blank documents, papers you don't understand or those that someone promises to fill out "later;" trying to borrow more than you can afford, no matter what the lender tells you; and not being pressured or rushed. Reputable lenders always allow borrowers to take their time and consult someone they trust. If your instincts tell you something's amiss, you are probably right.

Email your comments to rjeditor@dowjones.com.