This problem occurred in about 2006, when the market first began to turn downward. The Buyer owned a number of rental properties. Each had been remodeled, rented and the loan paid off in 2 or 3 years. The Buyer had a substantial down payment, great credit rating, and a good track record as a land lord. We located an inner city property in Milwaukee requiring updating. He offered near full price and the offer was accepted. Something strange happened on the way to a closing.
This was at the beginning of the fall. Many lenders were making their own rules and guidelines to follow. It was difficult for anyone to guess what was coming. The lender came back with a set of demands. Before providing funds the lender wanted the Buyer to update the property with new paint and carpeting. The accepted offer was in the $20,000 range. See any problems? It all sounds simple. Buyer updates the property, Lender provides the money, and we close, transferring Title.
That was the problem. Part of the offer included the Seller’s, in this case one of the major banks, addendum, which included wording to the effect, the Sellers reserves the right to cancel this contract……
They were asking the Buyer to invest money in a property he did not own, and may not own. A lot of questions had to be asked. If the Buyer invested his time and money in the property, would the Lender come though with the loan and close? Would the Seller cancel the contract, and relist the now improved property at a higher price?
I have not heard of another transaction with this problem, nor anyone who lost money on such a scenario. The Buyer backed out and was released from the contract by mutual agreement with the Seller due the inability to obtain a loan.
I called the Lender asking why they would put a Buyer in such a position. To my surprise I received a call from someone identifying themselves as a bank president. I was not ready for his response. He told me, “you have not seen anything yet. When we (the banks) tell you to jump, you are going to ask how high.” I felt this was the hand writing on the wall. Things did get much worse than anyone could have imagined.