Seller wants downpayment before closing

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Latest post Wed, Nov 16 2016 10:46 AM by karen2222. 14 replies.
  • Thu, Nov 10 2016 8:38 PM

    • Trizzy123
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    Seller wants downpayment before closing

    I'm looking for legal advice regarding purchasing a home Contract for Deed. 

     

    I unfortunately went through a foreclosure in the past due to a major medical crisis (cancer). Therefore I am not eligible for a regular mortgage at this time. In my desire to move towards home ownership again, I sought out Contract for Deed financing. I have found a private investor that will finance my contract for deed, and we have agreed on fair terms. Up to this point things have gone smoothly, with the investor giving me full reign on choosing the home I'd like to purchase. I have now found said home, and the purchase is pending. The actual "buyer" is my investor, and once he closes on the home, we will turn right around and sign the contract for deed. I will then take possession of the home. 

     

    My investor is only slightly experienced with this whole process, having done this three other times in the past. Up until recently, my assumption was that like a regular purchase transaction, my downpayment was due at closing. Well, today I received an email from my investor saying that the downpayment was due when the inspection period on the home ended (at that point he can't back out of the purchase without losing his earnest money).

     

    Besides making me a little leery, this doesn't seem correct to me. I don't feel comfortable paying the down payment until the signing of the contract for deed. Also, am I correct that he can't convey his interest in the property and even execute the contract for deed until he actually owns the property? I would be giving him my downpayment for a house that isn't even his to give yet (until he closes on it). 

     

    I honestly don't think he is trying to scam me. I think he is just trying to secure that I go through with my side of it, and I don't back out leaving him stuck buying a house that he doesn't need. If I am correct and that is the reason he is asking for the down payment now, I'm not entirely sure how to alleviate that. But I do not think the down payment up front is correct or safe for me to do. 

     

    Note: I will be hiring a lawyer to at least over the contract for deed documents and alert me to potential issues. I haven't gotten to that point yet, so I am turning to you experts for help with this situation.

     

    Any advice would be greatly appreciated. 

  • Fri, Nov 11 2016 6:16 AM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    I sought out Contract for Deed financing.

    Absolute WORST way to buy a house.  If this is your only option walk away and wait it out until you qualify for FHA or another conventional mortgage.

    Trizzy123:
    My investor is only slightly experienced with this whole process,

    This should be a HUGE red flag to run from this deal.

    Trizzy123:
    Also, am I correct that he can't convey his interest in the property and even execute the contract for deed until he actually owns the property? I would be giving him my downpayment for a house that isn't even his to give yet (until he closes on it). 

    Which is why you should run from this "deal".

    Trizzy123:
    I honestly don't think he is trying to scam me. I think he is just trying to secure that I go through with my side of it, and I don't back out leaving him stuck buying a house that he doesn't need. If I am correct and that is the reason he is asking for the down payment now,

    If that were the case he would have you put the money in escrow.

    Trizzy123:
    Any advice would be greatly appreciated. 

    RUN do not walk away from this deal.  Buying a home on contingency places all the risk on you and NONE on this "investor".  Banks are loathe to refinance these contracts into conventional mortgages because the buyer instantly lands upside down in these loans because the interest rate is a LOT higher and they often pay more for the home than it is worth due to their credit.  If he defaults on the mortgage in any way (unless he is paying cash for the home in full) then you lose the home and have no recourse when the bank forecloses because you are nothing more than a tenant regardless of that "deed".

    "That's just my opinion, then again I might be wrong."  Dennis Miller

     

  • Fri, Nov 11 2016 7:59 AM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    the purchase is pending.

    Please explain exactly what this means.  Has your "investor" signed a contract with the seller?  Have you signed a contract with the "investor"?

     

    Trizzy123:
    my assumption was that like a regular purchase transaction, my downpayment was due at closing.

    In a "regular purchase transaction," the entire sale price is due at closing.  The so called "down payment" is paid by the buyer, and the balance of the sale price is paid by the mortgage lender.

     

    Trizzy123:

    I received an email from my investor saying that the downpayment was due when the inspection period on the home ended (at that point he can't back out of the purchase without losing his earnest money).

     

    Besides making me a little leery, this doesn't seem correct to me.

    This isn't something that should be in any doubt, and I'm not sure what "doesn't seem correct" means.  Assuming there is a written contract between you and the "investor" and/or a written contract between the "investor" and the seller, one or both of those contracts should clearly say when this payment is due.  Right?

     

    Trizzy123:
    am I correct that he can't convey his interest in the property and even execute the contract for deed until he actually owns the property?

    I assume "he" is the "investor."  Until the "investor" "actually owns the property," he has no interest to convey.  However, there's no reason two parties can't sign a contract in anticipation of one of them acquiring an interest in real property.

     

    Trizzy123:
    I would be giving him my downpayment for a house that isn't even his to give yet (until he closes on it).

    IF you signed a contract that requires you to make this payment, I certainly hope you ensured that the contract contained appropriate provisions to cover various contingencies, including if the "investor" doesn't actually obtain title.  Did you do that?

     

    Trizzy123:
    Any advice would be greatly appreciated.

    No one on a message board should be giving legal advice, and relying on advice obtained from anonymous strangers would be unwise.  Without knowing what contracts exist and what any contracts say, the only intelligent advice anyone can give is that you consult with a local real estate attorney.  The advice in the prior response in this thread that you "run from" this deal is ignorant and foolish since we don't know anything about any contracts you may have signed.  "Running from" this deal may put on you in breach of contract and on the hook for tens of thousands of dollars in damages.

  • Fri, Nov 11 2016 8:11 AM In reply to

    • Drew
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    Re: Seller wants downpayment before closing

    You would be smart to run with written copies of your deals to competent real estate counsel like ASAP if not sooner .Impossible to divine from afar .....



  • Fri, Nov 11 2016 8:17 AM In reply to

    • Drew
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    Re: Seller wants downpayment before closing

    You would be smart to run with written copies of your deals to competent real estate counsel like ASAP if not sooner .Impossible to divine from afar .....

    I don't think you have mentioned  your state ....that matters as well...but #1....get counsel .

    ( In my state such a two step deal triggers two sets of transfer taxes which can be big items in some counties ) 

     



  • Fri, Nov 11 2016 2:47 PM In reply to

    Re: Seller wants downpayment before closing

    I advised you, on another site, to get a lawyer now.

    Seems to be the consensus.

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  • Fri, Nov 11 2016 3:49 PM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    I don't feel comfortable paying the down payment until the signing of the contract for deed.

    You and the investor should already have signed a contract detailing each of your responsibilities and their timing, BEFORE either of you takes any steps with which you or he are uncomfortable in the absence of such a contract.

    Your contract should cover all the contingencies, and should preferably minimize mismatches between the investor's risk and yours.  So for instance during the time between expiration of the inspection contingency and closing, it would be fair for the investor to want from you a cash payment equal to his earnest money deposit, plus some or all of the other costs he has to incur that would not be refunded if he were to breach his purchase contract and walk away from the purchase.  For example, the home inspector's fee.  Collecting more than that from you would NOT be reasonable.

    But the big picture is, if you and he have not yet nailed down all the details between the two of you AND signed your agreement laying out all those details, then I think this is a disaster in the making and you need to pull the plug ASAP.  Before the inspection contingency expires, which is typically not a long time (normally 10 days in my state).

    Then after you are both free from the time pressure caused by being in contract to buy a specific house, if you are both game to keep trying, you can do what you should have done the first time and work out your contract (with the help of a lawyer on your side - he can hire one too if he wants) BEFORE you find the next house to offer on.

    And last but not least, a general word of warning:  it is a mistake to rely too much on the clever and careful wording of a written contract.  It's a very useful exercise to think through what would happen if the other party breaches the contract.  Do you have the resources to sue him successfully?  Does he have the resources to pay up if you win a court judgment against him?  Do the laws of his state exempt too many of his assets from the collection efforts of a judgment creditor (you, if you sue him and win)?  Is the time, effort, and money you'd have to spend on suing him worth it?

  • Sat, Nov 12 2016 10:06 AM In reply to

    Re: Seller wants downpayment before closing

    I know you didn't ask about the overall wisdom of using a contract for deed, but I agree with ClydesMom that they are not a good choice for the buyer.  ESPECIALLY the typical buyer, who has little or no savings to draw on if and when things happen that threaten their ability to fulfill all the requirements of the contract.

    If what is driving your participation in this transaction is emotional (you deeply WANT something you feel it will give you, whether that's the feeling of being a homeowner, or the idea of having the particular house you selected, or both of the above, or something else entirely), that should be a red flag that you are very vulnerable to kidding yourself into doing something that will end up ruining your finances again.  Just sayin'.

    In case you haven't already read it or other similar explanations of the pitfalls, here's a link to just one such discussion of contracts for deed.

  • Sat, Nov 12 2016 1:36 PM In reply to

    • Drew
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    Re: Seller wants downpayment before closing

    There is a big red flag in your post...you post you do not have a writtten contract for this deed deal......very unsafe ...again, strong reason to get counsel like yesterday !  ( Do not rush to sign a deal....could be worse that no deal ) 



  • Mon, Nov 14 2016 11:49 PM In reply to

    • Trizzy123
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    Re: Seller wants downpayment before closing

    Thank you EVERYONE for your detailed and informative responses. I will elaborate on the situation a little more:

     

    There is a contract for deed drafted, and I have reviewed it, but no one has signed/executed it yet. I've found an experienced lawyer in my area, and will be meeting with him this Thursday. So at this point, nothing official has taken place between me and the investor (NO signatures have been signed on any agreement, and no money has been given).

     

    There are actually two contracts that we will be signing. A purchase agreement between me and the investor, and then the contract for deed between me and the investor. The process that we have verbally agreed upon is this: I find the home I would like to purchase. A purchase agreement between the seller and my investor is written for the home. The purchase agreement will be contingent on inspection. Once the inspection period is over (and therefore my investor is then committed to him buying the home), the investor and I will then sign our purchase agreement between the two of us, with me putting down $1000 in earnest money. We haven't gotten to that point yet, but I plan on adding a caveat to our purchase agreement saying that should his end of the purchase fall through, that I get my earnest money back. A few weeks later, the investor will close on the property between him and the seller. He is then the owner of the home. The following day, he and I will meet to execute our contract for deed. I will review the title work and the deed (showing he is now the owner). We will then sign, I will give my down payment, and take possession of the home. I will be recording the contract for deed with the county. 

     

    Does the order of all of this sound logical?

     

    As of today, this is where it is at: the investor has written a purchase agreement (between him and the seller) on the property I found. The purchase agreement has a 10 day inspection contingency. The inspection is being done this Wednesday, and the inspection contingency has to be removed by Friday. By Friday I will have reviewed both contracts between me and the investor (the purchase agreement and the contract for deed) with the lawyer I found. If the investor and I do not agree on the terms of either the purchase agreement or the contract for deed, then the sale will be cancelled. If we do agree, only the purchase agreement between us will be signed (and the contract for deed signed and my down payment given after the investor closes on his side of the purchase).

     

     

    Tomorrow I will be sending an email to my investor asking for references on him. I want to speak to one of his other "clients" that have done a contract for deed with him to get their opinion.

     

    Is it within my right (and reasonable) to ask for his social security number and run a credit report on him? 

     

    Are there any other safeguards you suggest that I do to find out more on the investors background?

     

    Again, thank you for the valuable information all of you have provided.

     

     

     

     

  • Tue, Nov 15 2016 4:35 AM In reply to

    • Drew
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    Re: Seller wants downpayment before closing

    Your state changed its contract for deed law rather recently .....I don't know how it works .

     

    Conracts for deed can be Royal problems for buyers if seller drops his end of deal or buyer violates even a tiny covenant in the deal .

    Just how does investor make money in this deal ? 

     

     



  • Tue, Nov 15 2016 9:21 AM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    There is a contract for deed drafted, and I have reviewed it, but no one has signed/executed it yet. . . .  So at this point, nothing official has taken place between me and the investor (NO signatures have been signed on any agreement, and no money has been given).

    If this is true, then your statement in your original post that you received an "email from [your] investor saying that the downpayment was due when the inspection period on the home ended" makes no sense.  If there is no binding agreement between the two of you, then there can be no payment "due" at any time.

     

    Trizzy123:
    Does the order of all of this sound logical?

    Not at all.  I would be beyond stupid for your investor to commit to purchasing property without having any agreement in writing with you.  That's mostly his problem, but the lack of an agreement means he could choose to do something with the property other than sell it to you.

     

    Trizzy123:
    Is it within my right (and reasonable) to ask for his social security number and run a credit report on him?

    It's within your right to ask for anything you want.  However, I doubt you have the ability to run credit reports for anyone other than yourself, and I seriously doubt your investor would provide this information.  To be frank, it is baffling that you're this far into the process and haven't done basic diligence.

     

    Trizzy123:
    Are there any other safeguards you suggest that I do to find out more on the investors background?

    It's a little late to be asking this.  The terms of your agreement with the investor should have been memorialized in writing FIRST -- before anything else was ever done.  With so little time, it's hard to imagine what else you could do at this point.

  • Tue, Nov 15 2016 11:49 AM In reply to

    • Trizzy123
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    Re: Seller wants downpayment before closing

    Thank you for all of the input. I'm sorry if I've confused anyone.

    I'm realizing that things were done very backwards at this point. I agree that the investor is putting himself in a predicament by writing a purchase agreement on a house before he and I have anything in writing. All of the terms we have discussed have been via email. Nothing has been signed and no money exchanged. 

    He stated to me that we need to finalize our documents prior to the inspection period on the house being up. Before that, the whole thing can be cancelled without any loss to anyone. Once the inspection period is over though, he can back out of the purchase with the seller, but will lose his earnest money. I have no agreement signed with him at this point, so the loss would be his as of now. 

    Because he is a friend of my family member, I think we have both treated this way too casually. This will not be my approach from here on out. I did research him with my state attorney general and the department of commerce and everything comes up clean.

    The advantage to the investor is a tax incentive, but mainly the interest rate the contract for deed would be at (6.75%). His main profession is as a commercial real estate agent, which I'm not sure is good or bad (does he know loopholes most people don't which could bite me in the a$$?)

    My main point in my original question had to do with the standard contract for deed process. Typically, when there is a third party involved in the transaction (where there is an investor that is buying the house from the seller, then the investor turns around and "sells" it contract for deed), what is the order of execution? Is the contract for deed typically signed BEFORE the investor actually closes on said house (or for that matter, even makes an offer on a house)? Or is the contract for deed signed at the end once the investor owns the house and can therefore give possession of the property?

     

    My impression was that contract for deed closings work just like a regular closing, where the documents are signed, down payment is given, and then keys are handed over. Is this not the order it typically occurs? Again, I fully agree that these details should have been agreed upon long ago...

     

     

  • Tue, Nov 15 2016 1:52 PM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    My main point in my original question had to do with the standard contract for deed process. Typically, when there is a third party involved in the transaction (where there is an investor that is buying the house from the seller, then the investor turns around and "sells" it contract for deed), what is the order of execution?

    I have no reason to believe there is a "standard . . . process" for this very non-standard transaction.

  • Wed, Nov 16 2016 10:46 AM In reply to

    Re: Seller wants downpayment before closing

    Trizzy123:
    My main point in my original question had to do with the standard contract for deed process. Typically, when there is a third party involved in the transaction (where there is an investor that is buying the house from the seller, then the investor turns around and "sells" it contract for deed), what is the order of execution?

    I'm certainly no expert, but it was my impression that this arrangement, where an investor buys a home specifically in order to sell it right away on a contract for deed, is a new "thing" that almost never happened until after the foreclosure crisis.

    As a general rule, contracts for deed have always been free-form, completely up to the parties to negotiate, but apparently the MN government has gotten involved to the extent that it provides a template people can use (on the MN Department of Commerce's website), and that in 2013 the Legislature passed a law (described here) penalizing buyers who don't get their contracts recorded within 4 months of contract execution and requiring new seller disclosures to buyers. The disclosure requirements appear not to apply to your investor since yours is only his fourth such deal.

    This 4-month deadline for recordation is almost certainly the reason Minnesotans wait until after the investor has completed his purchase before they execute their contracts for deed.  That, and the likely requirement from the recorder's office that the specific property be identified in the document (so it can be filed in the right place).

    But you CAN include the entire proposed contract for deed, filled out but not yet signed, in the contract you sign now with your investor so the wording is locked in.  You'd both agree to execute the actual contract for deed within a certain timeframe after the investor's purchase closes, or even possibly as part of his closing, if the escrow agent handling that closing is willling to do that for you.

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