Two Breaches Don't Make a Right...

We do a lot of transactions that involve buying or selling properties that are ‘distressed’ properties.  The dictionary defines distress as:  a state of extreme necessity or misfortune.  A distressed property might be anything from a vacant, bank-owned home, a pre-foreclosure that involves tenants being forced to move, or a traditional sale where the sellers are forced to sell and must walk away from a large down payment that has been lost to them in a declining market.  Currently, 60%-70% of all homes closing in the Phoenix Metropolitan area would fit into this category.

Distressed sales are never ideal for the sellers or residing tenants and can introduce a myriad of possible problems at close of escrow for a potential buyer.  What happens if the property is damaged or ‘trashed’ before Close Of Escrow (COE)?  What if the occupants leaving take appliances, fans, or fixtures that are supposed to convey or stay with the property?    What if a vacant property has had vandalism that has altered the condition of the home? 

What remedies do you have as a buyer of a home if one of the above problems arises shortly before close of escrow (COE) or recordation?

There is a short answer to this question and a long answer.  Most people want to know if they can refuse to close until the property is ‘whole again’ or demand some kind of compensation for the damage before close of escrow.  So here is the short answer:  Just because the other party has breached the contract, doesn’t give you a legal right to breach it as well.  How can you be breaching the contract by refusing to close escrow?  You agreed in the contract to close on a specific date.  Remember your mother telling you two wrongs don’t make a right? – Yep, it’s still true.

This post was originally 5x the current length it is now, because I started with the long answer.  The long answer involves taking a detailed look at the purchase contract we use in Arizona to define what the parties have agreed to in terms of:

1. the condition of the property
2. the inspection periods
3. the seller warranties
4. the seller’s obligation to inform the buyer of changes in the property
5. remedies the non-breaching party has against the breaching party

Suffice it to say that there is much that can be discussed and a great deal of detail along with different ways to circumvent through the above mentioned items.  It is imperative that your agent has extensive and skilled knowledge at trying to pro-actively address and protect you as much as possible.  For instance, my partner and I feel it prudent to conduct 2 walk-thrus of the property before close of escrow. The first walk-thru should be completed about 6 or 7 days before close of escrow and then a second one done a day or so before the close of escrow, after any occupants have vacated the property.  Will this earlier walk-thru guarantee discovery of a potential problem? - No, not necessarily (especially if the breach hasn’t occurred yet).  Might it help you discover a problem  before it’s too late to put into action some of the built-in remedies allowed for a breach of contract – specifically a 3 day cure notice delivered to the seller? – Absolutely!

Ultimately we will tell you this, when the property isn’t handed over in the same condition as it was when the contract was agreed upon, the solution is not as easy as the buyer refusing to close escrow and you could be forced to make some tuff decisions at the last minute.  Make sure you are prepared for the possibilities and realize that this is one of the inherit risks of getting a great home at rock bottom prices.

Thanks for reading!