Attorney Sean Clemmensen of Tiago Title joins the show. We discuss what happens with earnest money once a buyer terminates the contract. If the seller can be held responsible for repair issues after closing and things agents should know to stay out of trouble.
Troy: Welcome back to Real Estate Insights with Troy Schlicker. Today's guest is Sean with Tiago title. How's it going today, Sean?
Sean: Good. Troy, how are you?
Troy: I'm doing well. It's been good week and so weather's been nice here in Austin. A lot of things going on.
So yeah, it's been a good week. How about you?
Sean: Same. Thanks for having me on.
Troy: No, always a pleasure. It's lot of people have to pay big money to have to sit down and talk to an attorney. So to be able to do it and get some insights is always valuable.
Sean: That's what I'm here for.
Troy: Nice. So yeah, I had a couple questions that I thought might be Seem common in the real estate side of things when I deal with buyers and sellers and so thought it might be good to get a attorney's perspective on how these are handled.
Obviously every situation's very specific, right? So unfortunately, like in, when we talk about things like this, it's gonna be generalities because. There are the devil's always in the details. That's why attorneys make good money because the details are what matter. But we can still give broad strokes, I think, about how situations tend to be handled, which I think are still beneficial for people.
Sean: Yeah, absolutely.
Troy: So I know one of the first common questions that I can get asked from seller clients is if they have a client, if they have someone go under contract with them and then back out after the option period. Or even sometimes they'll ask it during, if they back out during the option period, but they'll ask if they're able to keep the earnest money from the.
and obviously during the option period you don't have that, the reason you have an option period is so that the buyer has that timeframe to do some due diligence without being more locked in than the option fee. But even after that it's still pretty rare to, to be able to have that happen.
So how do you general in, again, in generalities usually discuss.
Sean: Yeah, and like you said, it depends on who's asking the question, if it's on the seller side generally you have to look at what exactly was the reason for termination and for sellers it's rather difficult to get your earnest money back unless you have a buyer that has defaulted.
Somehow under the contract title companies we're neutral, third parties we're fiduciaries. So we owe a duty of essentially impartiality to both sides. So we can't arbitrarily make decisions to deliver money to the seller, to deliver money to the buyer. But for a seller, it's rather difficult because not if you're gonna sell your house and you get.
Upset and you wanna sue the buyer. If you sue for things like specific performance as a remedy, then it ties up the property, it creates a cloud on title, and you're unable to sell it. So a lot of times sellers end up having to relinquish or give back the earnest money to the buyer regardless of what the reason was.
Now there are times where you can, as a seller decide to sue the buyer for whatever reason. If you believe the buyer was in default, and you can take it to court. You just have to be okay with understanding that there may be a delay in selling your house. And conversely, on the buy side if you terminate for a valid reason or justified reason, but the seller's refusing to release the earnest.
one of your options is to have to sue. For the contract's only worth the paper it's written on unless somebody's willing to sue to enforce it. So even if a buyer feels wronged or damaged, or believes that the seller's wrongfully refusing to release U earnest money, you're gonna have to, most likely, you're gonna have to end up suing to and JP court, most likely just to the Peace Court to get a judge to rule and issue a ruling that the title company can release earnest money to the buyer because, again, title.
We can't just arbitrarily decide who gets the earnest money, regardless of whether to think we think that one party's entitled to it or not.
Troy: Sure. And in your
Sean: Do you have, do you.
Troy: often. I say in your experience, do you, is that, how often does something like that happen? Obviously it's like lightning, right? Like lightning, rarely strikes anybody. If it strikes you, you feel it. And so if it happens in your real estate transaction, it doesn't matter that it's a rare occurrence, it's still gonna be.
Still going to hurt and be a pain to do. But in, in your experience, obviously with a total company, you've seen a lot more transactions that you know, overall than just an individual real estate agent. Kind of what is your perspective and how often it really gets to that level of just disagreement between the buyer and the seller over something like that?
Sean: The district? That's a great question, Troy. The disagreement itself is rather common, right? Especially in the last three years where we. Yes. Yeah. A really heightened market. Tensions were high. People wanted to close. The, a disagreement itself wasn't uncommon. Resorting to suing or lawsuits was uncommon because the practical side of this like I alluded to earlier, for a seller in such a hot market the last thing you wanted to do was tie up a property.
In practice what ended up happening is buyer and sellers would work it out agree to some sort of split, or the seller would release it back to the buyer and it would be resolved. Disagreements are common among in earnest money disputes, but resulting to a lawsuit or even mediation, which is required before a lawsuit is filed, is rather.
Troy: Yeah, no, that's my experience. I don't think I've ever had it go a deal ever go that far to the actual extreme of needing a lawsuit. There've been a couple rare occasions where it gets contentious after the fact. And but like you say like even, again, in Texas, Contract is very buyer friendly.
There's a lot of different outs that they have for completely legitimate reasons that if you really took it to court, a judge is gonna say, yep it's the buyer's money to have back. And so it's definitely very buyer friendly, but there have been instances where a buyer has backed out and it wouldn't fall under one of those.
One of those cases where they sh are re are deserving to get the earnest money back. And even in those cases, like you say, it's just rare that it makes so much sense to to pursue it too much again. Every once in a while. I've seen where we're will to negotiate a portion of it occasionally, but for the most part it's like part of just the part of what you know could happen when you go into a real estate transaction.
Sean: Yeah, and did you ever, the last three years were obviously unique and different. Did you ever have buyers contact you and say, Troy, I'm under contract and you're the agent. I need to find a way out, because that was a. Question I got in the last three years, properties didn't appraise and they'd say, Sean, I need you to get me out of this contract.
Troy: So obviously again, we can't, it's a little trickier as far as that. Like it's one of those going into it. , you'll usually try to explain to a buyer, okay? We obviously have this option, period. You can get out in. Hopefully seven days that we have to do the option. Although in the last couple of years it's been like you get a 3D option period, or you get a, you're normally a seven may be a 10 day option period if you're lucky to do the majority of your due diligence.
And then from there, we saw most contracts though, having appraisal waivers, so you couldn't get out based on an appraisal because. Submitted an appraisal waiver. And appraisal coming in low wasn't gonna get you out of it. Obviously, if you had lending, there were potential options that something outside of the appraisal could could be the issue there.
Then on top of it, there's also things like your HOA documents, your title documents and things that as a buyer you're allowed time to review. And if there are things that are an issue for you, then that is another way that you can look at getting outta the contract. And so it's right, it's not generally that hard to find something that you suddenly have issue with if you don't love the property anymore.
What you're willing to accept with the property changes significantly if you've soured on the property itself.
Sean: Like you said, I mean there are over 30 ways to get out of the contract as a buyer, so you're a hundred percent right. There's, you find you, it's pretty easy as a buyer to find some sort of way out of the contract and try to justify the termination.
Troy: Yeah. Which is goes back to a good point of why, sometimes buyers are like why do I have to put up any money? The option money? Like, why do I have to put up, 200, $500. $2,000 over the last couple of years in order to have my offer accepted. And that's very specifically why is once your offer is accepted, you're in the driver's seat.
And so it's basically that consideration for the seller to, let you go through everything that you get to go through and hope you continue to move towards closing. So there's. while still the majority of homes that go under contract go to go to closing. I don't know the specific numbers, but I mean it's, probably 80% or more.
The seller is still taking a risk by accepting your offer, even if it's a phenomenal offer.
Sean: Yeah, a hundred percent.
Troy: Another one of the questions that I had here was issues with being an intermediary. A lot of. If they're, especially if you're listing the home, it's about the only way you're gonna become an intermediary. But you might hold an open house, might get a lead from online or have someone inquire about the home that isn't represented.
And I guess for probably two per question, like for an intermediary, what's the downside as a buyer or. with having your agent being intermediary, and then secondly, what are the potential downside? For be as an agent or as a broker, technically as a broker, being the intermediary win, obviously the upside is, oh, I can get the commission on both sides of the transaction.
And so unfortunately, most people are very money driven. And so that's all they see in that regard. But what are some of the poten, and potentially some of the benefits as well too, but some of the benefits and drawbacks with going that route, which is pretty rare.
Just fyi. So like it's
Sean: Yeah, that's a, that's a great question in intermediary as to, as a starter. There are two types of intermediary. One is the basic intermediary status and one is advanced intermediary status. This is a broker. The basic intermediary status is one agent that represents both the buyer and the seller, right?
And when you're in that basic intermediary status, all that you can do as an agent is essentially relay facts, right? You can't have opinions, you can't give advice. If a, if your buyer says I want a $2,000 seller credit, what do you think? , all you can do in that instance is pass along the request of the seller, buyer would like a $2,000 seller credit.
Neither one you of, which you can give advice to. So in the basic intermediary status, the liability risk is high, in my opinion, because you are a professional, as a real estate agent, you're giving your experience, you're giving your advice that what's, that's what makes you so valuable to the common person, right?
And so for a client, a buyer, or a seller, if you aren't able to give them advice, they generally get rather upset. Those are the, in the basic intermediate status, that's where you see a lot of lawsuits. You see a lot of Trek complaints that are filed because they don't feel adequately represented.
That's basic intermediary status, right? Presents a much more liability risk. Advanced intermediary status would be you as the broker appointing an agent to represent the buyer, and an agent to represent the seller. When you're in the advanced intermediary status, same broker, two, two agents, right?
You can give advice and you can give opinions. So a buyer, a seller, feels much more adequately represented. The likelihood of them suing because they don't feel like they got your experience is much less. There's still a risk, though, like you alluded to, right? There's this appearance risk. Okay both agents are at the same brokerage.
What's to say? Buyer agent didn't talk to seller agent and say, Hey, by the way, they're willing to take X. It's that appearance that, that is usually what causes a buyer oil seller to sue an agent for breach of their duty in the advanced intermediary status. So some brokers just in general have a, just a prohibition on intermediary whatsoever.
The ones that do allow it allow advanced intermediary status, agent for buyer, agent for seller, but I don't know any broker. That allow basic intermediary status where one a agent represents suit two sides. Frankly, most e and o insurance doesn't allow it either.
Troy: Interesting. Yeah, no, I know of a few. agents who have, or brokers who have theoretically done it. Again, I don't follow up on all other people's transactions to really
see how, see exactly how that goes, but but yeah, there's like you were saying, a huge component to me being good at my job is to be able to.
give my past experience, help with, looking at an inspection and saying okay, there's all these things in the inspection. Some of these things are standard because the home was built 15 years ago, and so it's probably not realistic to ask for, all the weather stripping to be replaced because it's 15 years old.
But, Hey, we should probably ask for these things because that makes sense. Now again, we don't know if the seller's gonna agree to 'em, but generally, if we are asking for fewer things, that's gonna be more likely for us to get acceptance than having this laundry list of things that we want the seller to do.
But again, there's all that knowledge of past transactions and what might work best and how we might be able to get, get. Get what's best for you as a buyer, or vice versa, a seller is out the window because you suddenly can't give any advice. It's literally handing paper from one person, handing it to the other and letting them make their own decision.
Sean: It would essentially be somebody coming to me for legal advice and saying, I'm sorry, I can't give you legal advice. , right? Who's gonna, why is somebody gonna wanna pay that? They're not, they're gonna be upset. So that's a good question.
Troy: No. Speaking of inspections occasionally you'll have a buy, a buyer. Everything mostly goes fine, obviously in the inspection is never perfect. Impossible to have an imperfect inspection. But it's good enough to go. They continue through with the process closing the home and 60, 90 days later there's an issue.
The HVAC goes out or there's, some kind of plumbing leak or something, and they'll. if they can, get, why didn't the seller know about this? Or why didn't the, seller disclose this? Can we get money back from the seller to fix this? What's your answer again?
Generic, generic wise, cuz there's, there are definitely potential outliers there, but in general, what kind of remedies does a buyer have in.
Sean: that is one of the most common questions that a buyer will ask me post-closing. And it's the con, it starts exactly like you said. I get a phone call from an agent or the buyer that says, I believe that the seller knew that the HVAC was defective. I wanna sue the seller. But that's generally how that conversation works.
And then it, and it progresses where I ask them, How are you certain that the seller knew? What knowledge do you believe that the seller had? Cause that's a critical element to proving D T P A cause of action, common law, fraud, statutory fraud. You have to prove that the seller actually knew, not constructive knowledge.
Actual knowledge, not my neighbor had a issue with their roof, so I must have an issue with my roof. You actually have to know that there was a defect. That's the hardest element to prove for most buyers, and frankly, One that's the most expensive. At the start of the podcast, you mentioned we were joking about attorneys and hourly rates, and that's exactly why so many buyers don't end up suing sellers because these lawsuits these decept, these D T P A lawsuits, For defective issues, you have to hire an attorney.
You pay the hourly rate. You go through written discovery, you go through depositions. You're trying to prove that the seller knew that there was a defect, which ultimately can be done. It's just very costly to get there, and so the conversation usually ends with, okay, this was a $2,500 repair. I think I'm just going to let it go.
Sometimes it ends with, I want you to send a demand letter to the seller. That's no problem and I want to stop short of a lawsuit. You can do that too. So it is not that these cases aren't winnable, cuz they certainly are. It's just very expensive to get there.
Troy: Sure. And so at that point, it's one of those where you have, there has to be almost a smoking gun. It can't, just the fact that something was, broke down or that there was an issue isn't enough. There has to be, in most cases, some other kind of smoking gun that is going to lead you to believe that you have a high chance of winning. Winning that battle because otherwise it's an up, it's an uphill battle. That's very tough to, and very expensive to go through.
Sean: uphill battle. And I'll give you just one quick example. So several years ago, Buyer called me and said I believe the seller knew about a foundation, some material defects with the foundation. And I said, how do you know that? What makes you believe that? By chance or luck, the buyer called a foundation company.
In, in Dallas Fort Worth and the Foundation company, receptionist said, yeah, we went out to 1 23 Main Street two years ago, and we suggested that they repaired the foundation. That is exactly what you're referring to, Troy as a smoking gun. That was easy, right? But most of the time it's not that easy.
But that's, and that's a prime example of what you are calling a smoking gun. And but they're usually not that.
Troy: In kind of in foundations cuz right in Austin, Texas, on more the east side of the city. We do run into. Foundation issues from time to time just because and one of the interesting things I think a lot of people don't realize is it's really rarely the foundation itself that is the problem. It's actually the subsurface, the grade, the soil, the rock or whatever.
And so the reason that it's more common to have a home with foundation issues in, in east Austin than it is out west towards the lake is out west towards the lake. It's almost all immediately limestone. Once you. Three inches below the level of the ground. And so obviously rock doesn't move a whole lot.
Whereas you get further east, you have a much a much thicker layer of clay soil, which. Absorbs water because we're in a semia, semi arid area. You absorb some water in the spring and we have a ton of rain, and then it gets really dry when we don't have rain for six months and the lake goes down to almost nothing.
And so that absorption and contraction of the soil, the house has nothing else to do, but try to move up and down with that. And so then because of that, house is a pretty rigid entity. A lot of times it'll. Some foundation issues. And so it's not usually the construction per se, but it's the soil that's underneath the home in that case.
And so from a builder's standpoint, what kind do you, are you aware of any specific kind of liability they have or any, maybe not liability, but responsibility for knowing That kind of stuff when they're, when a sub, when they're putting a subdivision, if they're putting a subdivision out in Pflugerville or out in Hato or some of those areas where this could be a concern what kind of responsibility they have, knowing that's the case.
Sean: That's one of, I l learned an interesting tidbit there myself. I had no idea about the difference between east and west. That's pretty cool that that, that to answer your question about builders, if it's a new builder, there's usually a statutory one, two, and 10 warranty, right? One of them being structural.
But settling is this com like you're, basically what you were saying, settling is understood that just happens in Texas. So unless there was some issue with the construction itself settling is generally not going to be some sort of li the builder's not gonna be held liable for some sort of settling of the foundation or even the lack of consider.
That the foundation shifts, in a lot of these new build contracts. And you'll see in these new build contracts, there's dis, there are disclaimers of warranties, there are releases, and so especially if they've written their own contract, it's very difficult to go get a builder to be held liable for some sort of foundation issue.
Unless it's truly an issue with the construction of the foundation, which you do see. Much more, most likely in Dallas Fort Worth than you do here, because we don't have than you do in Austin because of the the limestone. So it's probably less common here than it, less common in Dallas Fort Worth.
But it's pretty hard to get a builder held liable, frankly, for anything.
Troy: There's a reason that the track contract, this is like 12 pages and then you have, some addendums you might end up with a 20 to 30 page. Total document put together. When I'm helping someone buy or sell a home that's a resale home with sellers disclosures and all that kind of stuff.
And if you go to a builder, you're generally signing about 70, 80 paper pages. And so there's they're covering themselves,
Sean: Oh yeah.
Troy: and making sure that it's the reason for all those extra pages is to make sure more stuff is in their favor than it would be on a traditional resale for.
Sean: Yeah, I think I wrote one for a builder the other day that was 92 pages cuz that's what they wanted. Overkill. But that's what they wanted,
Troy: they just, yeah, they wanna be able to do their thing and then go on to the next project and not have to, again, and most of them do a good job. So it's not like they're writing stuff in there to get away with stuff, per se, but they're just protecting themselves as every, everyone should in a real estate transaction as much as.
Sean: Yep, absolutely.
Troy: Another question that I had more on the real estate agent side was so like, with the start of the year, I feel like it's all as people. Start to starter year always brings people who are thinking about buying or selling homes. It's that new year, new goals, new plans and everything.
And it also happens a lot of times I think for agents also, cuz it's generally the slower time of year that they may consider switching brokerages. You're not in the busy season anymore, you're thinking, oh new year. If I wanna hit new goals, I gotta find a new office to work at. . And so as a broker, every once in a while I'll get talked.
I'll get asked by agents, different questions as well too, but what are, what are things that agents should be aware of if they're switching brokerages? For example, I know one thing that most agents are pretty aware of, but if you sign a listing agreement for a homeowner to list your home and you're at X, Y, Z brokerage, I want to go to ABC brokerage.
That listing agreement. Technically an agreement with the broker, not with you as an agent. And so you can't just take that listing with you to the to now ABC brokerage. This goes around. And that's one I think that most agents are aware of. Hopefully should be a pretty basic one. But it gets a little trickier when it comes to buyers because not all agents, very few agents are signing up, signing buyers to buyers rep.
on the very first time that they have a conversation with them. Some of them don't even do that at all, even through the whole contract process. And so what are what are some things that agents should be maybe aware of if they are considering switching brokerages?
Sean: Yeah. And you. Hit the nail on the head when it comes to the agreement. So you are right when, if there's a listing agreement or if there's a buyer's representation agreement, it's a no-brainer. It's a non-starter that it's a, that buyer or that seller that is a product or a client of the brokerage, right?
So in, in it, outside of some sort of written agreement, It becomes much more complex and a lot more questions have to be asked primarily, what did you sign as an agent when you joined the brokerage? Did you sign an independent contractor agreement? Did that agreement have a non-solicitation? Did that agreement have confidentiality provisions?
Did that agreement have non circumvention language? All of which could be argued that if this was some lead that was brought from the brokerage, it's a product of a brokerage. , if it's a lead that you brought yourself, it's still possible that it could be based on the written agreements that you signed as an agent with your brokerage.
It's still possible that lead could be a client of the brokerage. And ultimately it's going to be what did you sign right outside of a written buyer's rep agreement or a listing agreement? What did you sign? And who generated the lead? So for most brokers a lot of brokers, in fact, Written agreements that basically state that there, if a client comes in throughout the course of your representation of them or while you're working at the brokerage, rather that it's a client of the brokerage.
Now in practice, do brokerages, hold agents' feet to the fire and say, you can't take this client with you. No. It's bad, it's not the best business decision. So a lot of brokers don't enforce it, but they want the ability to enforce it. And that is what a lot of brokers will ask me to do, is create these non-solicitation, non circumvention confidentialities and these various agreements, and have agents sign them when they join the brokerage.
Troy: Yeah, cuz as a broker, you want, again, you want to protect yourself and so you don't know the situation that could arise with an agent leaving leaving your brokerage and going somewhere else. But at the same point in time, like you said, As much as, obviously as a brokerage, we want to do as much business as possible.
You don't wanna try to handcuff a buyer to have to work with you. That's not gonna be a good experience for you. Build your reputation up as a brokerage or as a real estate agent. And in a lot of cases it makes the most sense for the buyer to be able to go with the agent to the new brokerage.
Like I say, again, it's every case is unique and that's why that's why protecting yourself is important and understanding as an agent what again, what you sign, right? Like unfortunately nowadays we sign a lot of stuff between all the different just online agreements for stuff. Click here before you can proceed.
And not very many people read most of that stuff. Use an attorney might read pro, you probably read more of it than most people.
Troy: Yeah. So it's important to understand what you're signing, so that way you're not surprised down the road if some, if a situation comes up that's, not in your favor.
Sean: Yeah, exactly.
Troy: Cool. That seems like some good questions for this week or this month. We'll see how often we do it. Maybe we'll, start doing it every day. I don't know. But there, there's probably enough real estate and realtor questions to have a podcast every day. But,
Sean: Oh yeah.
Troy: we have other things.
We have other things we gotta do, like actually help those realtor.
Sean: That's right.
Troy: I appreciate you joining today and look forward to doing it again.
Sean: Looking forward to it. Appreciate it, Troy.
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