December 2016 Great intent - Bad Execution

James L. Goldsmith, Esquire

I defend Realtors®.

Yes, in court, but I also stand up for the integrity, generosity and skills of our members. I challenge disrespectful attorneys, judges (although with more tact) and others who spew angry rhetoric at or about the profession. I just ask that you don't make it any harder for me by straying off the path.

What do I mean? Don't stray from what you do. Don't take on a new project, delve into a different practice area or continue representing your client when a transaction goes in an unexpected direction without an experienced or mentor or legal counsel. In other words, don't agree to represent a builder in a new development if all you know are resales, don't help a friend with a commercial transaction if all you know is the residential market, and don't proceed as if all things are "normal" when the transaction is anything but . . . .

The subject of this tale is of a buyer agent who has handled many successful residential transactions. To date, all of the transactions under his belt followed a pattern with which most of you will be familiar: consumer notice, review buyer's wish-list, check the MLS for availability, visit property, prepare CMA and offer, negotiate the agreement, inspection, renegotiate the agreement, mortgage, settlement, hugs and kisses. While every transaction has its nuances, there are patterns to the niches where we serve.

The transaction in question started much the same way. Starting with signing the consumer notice, the transaction progressed to the point where the buyer and seller were under agreement. Then it veered from the path. The buyer, a licensed salesperson, decided to market his equitable interest in the property before closing. The buyer's marketing produced a second buyer (buyer 2), who was willing to pay more than the first buyer (buyer 1) was paying to acquire the property. [Note: there are a host of concerns about conflict of interests, but those are not the subject of this article.]

Buyer 2 was also represented by a buyer agent who asked enough questions to know that indeed buyer 1 could market this property before buyer 1 acquired legal title. The agent for buyer 2, however, was way out of his league and completely unfamiliar with the transaction that this had become.

As a result of this agent's inexperience, buyer 2 paid a substantial deposit to buyer 1 without any special clauses or restrictions indicating whether the deposit was paid to buyer 1 as a licensee for safekeeping in an escrow account to be applied to the purchase price or whether it was paid to buyer 1 as equitable owner and seller of the property, and not to be held in escrow.

The agreement between buyer 1 and buyer 2 also included language requiring buyer 2 to pay the "margin" to buyer 1 five days before settlement. The "margin" was defined as the difference between what buyer 2 was paying buyer 1 for the property and what buyer 1 was paying the current owner. In this case, the margin was about $20,000 more than the deposit already paid by buyer 2. There was no language directing where or how this money would be held, and apparently buyer 1 pocketed it.

The agent for buyer 2 continued to stray even further from the path. After buyer 2 paid the margin, buyer 2 learned that the original seller had liens that would not be satisfied by the settlement date. At the time I received this call on the hotline, there was a question as to whether marketable title could pass without a quiet title action. Not surprisingly, buyer 1 is not responding to emails, calls or text messages from either buyer 2 or his agent.

There are other questions that would have arisen even if there weren't title problems or potential fraud. Would real estate transfer tax be paid twice - once when buyer 1 bought and once when buyer 1 sold? Are there two transactions or an assignment of one assignment from buyer 1 to buyer 2? Was the title owner involved in this second transaction? What due diligence was buyer 2 permitted to undertake? While this transaction is further from the beaten path than most, transactions that involve "flipping" and selling equitable interests are not terrible unusual.

Real estate lawyers who handle transactions like this know how to safeguard their client's interests. Had our buyer agent for buyer 2 referred this matter to an attorney, there either would have been a greater chance for the transaction to close or sufficient safeguards in place to protect buyer 2's assets. As it turns out, rather than a pay day, there is likely a day that will be set where the agent can defend his unauthorized practice of law, breach of fiduciary duty and negligence.

Heed this moral of the story: When you encounter a transaction that is off the well-worn path, beware. Have your client engage counsel and sleep easy.