Real estate rehab gone wild – the options?

January 21, 2014

I am sorry to read about your plight. There is not enough information here to give direction. The questions revolve around; why was the new septic not approved?  Is there a sales contract in place?

Rehab ProjectReader Question: My son was buying a home that the owner/contractor was to rehab. The deal started in June 2013 and due to issues he still has not completed the building. In December, the new septic did not pass inspection; therefore we ended the deal. I put a deposit down on the house, paid for hardwood floors, granite counters, all light fixtures, and all kitchen appliances. The owner/contractor is now refusing to return his deposit or repay for items I purchased. I am at a loss on how to help my son and do not know my next move. Please advise. William G.

Monty’s Answer: Hello William, and thanks for the question. I am sorry to read about your plight. There is not enough information here to give direction. The questions revolve around; why was the new septic not approved?  Is there a sales contract in place? Why is the home still not completed?  Even with an incomplete story, 3 options jump out and there may be more:

The three options

1. Try to work out a deal with the owner/contractor to buy the house “as is” and then bid out the completion of the job with a new contractor. Is it possible he too, views this whole transaction as a bad deal? He may be willing to walk away from continuing the project. If choosing this route, make the deal subject to an inspection, and you would want time to have other contractors inspect the house to give you a cost to complete it. Here is a link to an article to help pick out some contractors to bid for the work, should it be decided to take that route.

2. Try to make a settlement with the owner/contractor directly. Walk away, but receive a refund of a negotiated amount of money for down payment and materials. This is a negotiation, but it may be worthwhile. Consider this situation to be similar to a no-fault insurance settlement. The attitude going into the negotiation needs to be that both parties made mistakes.

3. Threaten, or file a lawsuit. This action may make it difficult for him to sell the home to anyone else, borrow money for other projects and disturb his credit and reputation. If the parting was not amicable, it also may be a tactic to get him to the negotiating table.

Before undertaking any of these suggestions, get legal advice. Never get in a fight that cannot be won, so understanding your case and your chances for success are important in deciding which of the above options, if any, are the most viable. Your attorney, with all the information and the signed contract in front of them, may have some other suggestion.

After having established a plan, set up a meeting with the owner/contractor. Make an outline of your points before the meeting. Give him a copy at the beginning of the meeting. Ask him to allow you to finish before he responds. Explain your goal is to resolve and not escalate the conflict.

At the meeting, remain calm and disable the quick tongue if you have one. Be respectful. Do not threaten him. After your presentation, allow him to react. Listen carefully to what is being said. If the conversation is going well, it may be appropriate to suggest acting on the solution. Doing so can get it behind you both.

Other considerations

Was there a real estate agent involved? Was the agent representing your son? If your son has a copy of a buyer agency agreement, include it with the documents to deliver to the attorney.

Like contractors and real estate agents, attorneys are not created equally.   Depending on the depth of your community’s attorney pool, find someone who spends considerable time around real estate or contract law, as opposed to estate planning. Hopefully, an attorney can be identified who possesses a track record of solving problems before getting to court. It is unclear the amount of money both of you invested, but lawsuits over lesser amounts can be costly with a zero sum game effect.

Finally, I would engage an appraiser to evaluate the present value of the home “as is” and “as completed” to provide a considered opinion as to whether option number one is prudent.