How to Defend Against Dishonesty

Invest Like Sherlock

Podcast Episode 71:
Some People Aren’t Honest.”

It’s sad to say, but there are dishonest people out there. Some real estate buyers, sellers, lawyers, and realtors will try to pull the wool over your eyes. A classic trick unscrupulous people use is to slip a clause into a document or take one out without you noticing. Luckily you can protect yourself from this and keep them in check by making sure to read contracts thoroughly, as well as to reread them after every round of negotiation and/or amendments. Vigilance is a necessary aspect of due diligence.

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Some People Aren’t Honest

Wha??? Barry, tell me it isn’t true!!!

Sorry, folks, it is true. I remember helping Don Campbell an apartment deal where was having a long, difficult set of negotiations with a seller. They went back and forth with numerous changes being made to the documents. When the final set of documents came to Don’s desk, he and I then gave that final version a very thorough going over. We discovered that the seller had reinserted a clause that we had removed from the lengthy contract three versions ago. The seller slipped it back in giving himself a huge advantage. However, we caught it, and we learned the hard lesson that some people are not honest. You have to read, reread, and check documentation especially when there are custom contracts.

One of our clients recently learned this lesson again in a Rent-to-Own deal. He had done a number of Rent-to-Own deals, and found that his legal accounts were quite a bit larger than they would be for a normal Buy-and-Hold deal. He completely understood that creative real estate takes more legal time, and therefore generates larger legal accounts, but he wanted to try to defray those legal expenses. His approach with a tenant buyer was to insert a term in clause 7.6 of the standard MLS real estate purchase contract to the effect that the buyer would pay the investor’s legal account to a maximum of $1,500.

When we sat down to review his most recent Rent-to-Own deal where the tenant was ready to buy the property, he gave me a copy of the signed contract. Then he took great pains to point out to me clause 7.6 where the buyer had agreed to pay our client’s legal account up to, but not exceeding, $1,500. “Duly noted” I said. “We’ll make sure that the buyer’s lawyer is aware, and we will advise them that $1,500 would be added to the price in the statement of adjustments.”

So, that’s what we did. In communicating with the buyer’s lawyer, we referred to clause 7.6 and indicated that $1,500 plus GST (of course) would be added to the purchase price and set out in the statement of adjustments. They didn’t say anything, and, in due course, we sent over our trust letter. On receipt of our trust letter, the buyer’s lawyer sent me a letter indicating that the buyer would not be paying the $1,500 because he wasn’t required to.

I was completely flummoxed; what was he talking about?

After some back and forth, the buyer’s lawyer sent me a copy of the page of the MLS contract that contains clause 7.6. His version had no reference to the buyer paying the seller’s legal fees not to exceed $1,500 plus GST. I phoned our client who was very surprised and didn’t have an answer. The next day he called me back and said, “You know, we went back and forth on a couple of things in the contract and in the scanning and faxing back and forth, when they finally signed off on the contract, they only sent me the signing page and not the other pages.”

So the arguments back and forth started. In the end, the buyer agreed to pay $800 of our client’s legal account, but not $1,500. To me, that just confirmed that they substituted their own page of the contract because they saw that they could. Why would they agree to pay $800 if they hadn’t agreed to pay anything? That just doesn’t make sense.

Our client decided this was just another tuition cost at REU (Real Estate University). He was making good money on the deal and he wanted to move on, so he accepted the $800 and we closed the deal.

 

Lessons Learned:

  1. Through each offer and counteroffer, get a full copy of the contract, each page initialed.
  2. Read each offer and counteroffer thoroughly. Those seemingly preprinted paragraphs can change.
  3. Initial important clauses to confirm parties’ awareness of same.

 

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

“Sherlock” image by HebiPics, used under a Public Domain Dedication, has been combined with the “money i’ll never spend” image by brian.ch under Creative Commons Attribution Generic 2.0.