Dan Gets Ghosted by a Seller
I learned an important lesson early on in my real estate adventures. Two lessons actually. The first is, a contract doesn’t mean the other party is going to abide by it. In some cases, they can purposefully not hold up their end of the bargain and get away from it without consequence. The second is, sometimes it’s best to cut your losses and move forward than dwell on the past. It takes a lot of energy to go about suing someone in another state. That energy can be better put towards other projects. So, what happened? Let’s dive right in.
I got under contract on a 20 unit property in a small, but in-demand market. I already had some fourplexes there and was looking to expand. The owners of this property had considered putting the property on the market a year earlier and they got flooded with offers. The property wasn’t even off market at the time. Now, a year later, it was on the market and I happened to get it under contract. I was excited. It was in a great area, I had a property across the street, and it would be a great value add. Everything in it was very basic. I could easily use my current management, put in two tone paint, replace the worn carpet with vinyl plank, and charge more in rent. The current owners obviously didn’t pay much attention to the property. This was going to be great.
It started to get frustrating really fast. I sent over a request for due diligence documents when we went under contract and didn’t hear much back. My agent and I would keep asking and they would say, soon we’ll get those to you. I started looking for lenders, lining up inspections, and all the normal due diligence stuff. More days went by with either no due diligence items or minimal ones. I should have expected this because it seemed like forever to get it under contract. The sellers were always out of town, or dealing with family issues. This pattern of excuses seemed to go on a while. The property inspection came back with a glowing report. That was good news.
Then, I got a call from my agent. They weren’t going to let the appraiser have access to the property. What? We were under contract! They have to allow this to happen if they’re under contract to sell the property. It says it right there in the contract! My agent convinced me to settle down and let him see what’s up. Well, I was already out some bank fees, the inspection fee, and the earnest money deposit was with the title company. Okay, this is getting interesting. Turns out, the sellers were looking to do a 1031 exchange and hadn’t identified a property yet. Okay, I get that. But good luck getting all that lined up and having a patient buyer. When my partner did the 1031 that got us started we hadn’t identified the properties to purchase yet when he closed on sale of his condo.
So, things were on a hold. I tried to come up with some creative solutions to help. One was a master lease on the property, and two other options I just can’t remember. Also, the details I was hearing about how they wanted to do their 1031 exchange didn’t line up as a proper way to do a 1031. I was puzzled. Things dragged on for another month and I was ready to terminate the contract, get my money back, and move onto new things. However, I read into the contract which was now expired, and saw that the sellers basically had my earnest money to themselves. Even though they defaulted on the contract, they would have to agree to release the earnest money back to me. WHAT??? How could that be? They ghosted me and defaulted? Why do they get to keep the earnest money? That sounds like a great way to unfairly make money to me. Luckily, they agreed to release my earnest money and we got it back. I think we lost out on 3-4 grand overall. Most of that was the property inspection fee.
So what was the lesson in all this? Well, first is that a contract doesn’t mean the other party will follow it. This happens all the time. All a contract really does is lay out some terms in written form. Sure, you can have a lawyer write one up in legalese, but that doesn’t guarantee the other party will face consequences if they don’t follow it. In this case, they defaulted on the contract and I spent money expecting them to hold up the terms of their contract. If I wanted to pursue litigation what were my options? Well I could sue them in small claims court. But that would mean I would have to fly out another state to do so. I’m not interested in that. I could have a lawyer sue them, but I would be spending at least 2-3 grand to try and recover 3-4 grand. Then, there’s no guarantee I could collect that money. That math didn’t make sense. I could also pursue something called suing them for specific performance. Basically, I’d force them to uphold the contract and sell their property under the terms of the contract. But that could take YEARS and cost tens of thousands of dollars. Then, there was no guarantee that I would win the lawsuit.
So yeah, I kind of got screwed by the seller and it wasn’t worth the effort to go after them legally. They cost me money, ghosted me on the sale of the property while looking for a property to 1031 into, and there wasn’t anything I could do about it that was worth my time. Next time, I was going to have a better contract to cover exactly this scenario and not use the states boilerplate commercial Real Estate contract
But overall, it was only a few grand that I lost but the learning experience was more valuable. My partners agreed it was best to just take the loss and move on to other things. Since then, I’ve made that money back many many times over and I don’t regret my decision. I wish I owned that property though. That would have been one nice property to own. It was the first and only time I’ve lost money in real estate. Since then, my subsequent deals have been pretty vanilla.