Seller Confesses Misrepresentation 5 Days Before Closing

: Richard Montgomery on Oct 29, 2024

Dear Monty: It is five days before closing. The seller notified us today that they are having problems with the city, and the three units we are buying are legally only two. We don't want to rent an illegal unit and can't rent that unit without having a legal permit. On top of it, a cousin of theirs living in this third illicit unit doesn't want to leave by our closing date. I feel discouraged because my agent keeps acting like our hands are tied, and without a legal third unit, we overpaid by about 20%. And we have already paid $16,000 in earnest money. Can we get that all back? Can we back out of this deal? Can we seriously renegotiate? Any advice is welcome.

Monty's Answer: This is undoubtedly challenging and stressful, but you have choices. Let's break down the issues and potential options:

Legal status of the property: The discrepancy between the advertised three-unit property and the legally recognized two-unit status is a significant material change. This alteration fundamentally affects the property's value and your intended use. In most jurisdictions, sellers must disclose such material facts, and failure to do so can be grounds for terminating the contract or renegotiating terms.

Earnest money: Given that the seller failed to disclose a material fact about the property timely, you likely have grounds to terminate the contract and recover your earnest money. Review your purchase agreement carefully, as it should outline conditions for the return of earnest money. Most contracts include contingencies that protect buyers in situations such as this.

OPTIONS MOVING FORWARD

No. 1: Terminate the contract: You have substantial grounds to back out of the deal due to the material misrepresentation of the property. Consult with a real estate attorney before the scheduled closing to determine if you can terminate the agreement and recover your earnest money.

No. 2: Renegotiate: You are in a solid position to renegotiate the price significantly. The loss of rental income from the third unit and the potential costs to legalize it (if possible) justify a substantial price reduction. Consider asking for a reduction that brings you the same return as the three units.

No. 3: Fix the issue: You could propose that the seller resolve the zoning issues and legalize the third unit before closing. You can also determine the cost and time required to fix the issue, deduct that from the current price and complete the required work to make the unit legal.

No. 4: Dealing with the current occupant: The presence of the seller's cousin in the illegal unit adds another layer of complexity. If you proceed with the purchase, ensure the property is delivered vacant unless you explicitly agree otherwise. The seller should be financially responsible for ensuring the cousin is out as agreed.

No. 5: Your agent's response is concerning: They should advocate for your interests, and without their side of the story, it sounds like they are attempting to squeeze you into a closing. Skip the agent and go directly to the agent's broker.

You have leverage in this situation due to the seller's failure to disclose material information. Refrain from closing when the property no longer meets your needs. Sellers might close at a lower price now, realizing it is unknown when a future buyer could appear and may offer even less if you walk away.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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