Dirty Little Secrets – The ‘Crack’ House

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This story is pretty bad but it definitely let me know that it is not just an occasional problem with deception and concealment about foreclosed property conditions – it is more the norm.  (It is a longer than normal article but well worth reading through to the end.)

I went with this client to see several properties before we finally found one that was exactly what they wanted.  A good amount of land, nice home with a beautiful pool area and at a price they could afford.

When we first saw the home my client noticed a cut in the master bedroom carpet of about 6 inches starting at one of the walls and we didn’t know why it was there especially since it was almost brand-new carpet and padding.  But it didn’t seem like that big of a thing and so we submitted an offer and after some negotiations were able to get the house under contract.

On the day of the inspections, the buyer and I showed up first.  The termite inspector showed up a few minutes later and while I was letting him in the buyer went back to the master bedroom and lifted up the carpet where the cut was and found that there was a crack in the foundation.  While the termite inspector was doing his work we lifted the carpet more and found out that the crack went from the back of the house to the wall where the master bedroom closet was and then after lifting the carpet in the master closet we saw that the crack ran from the front to the back of the closet.  And there were some cracked tiles in the floor of the master bathroom which was at the front of the house.  So there was a noticeable crack basically running all the way from the front of the house to the back of the house!

This wasn’t a small crack as you can see in the photo below and the foundation sloped slightly downward toward the exterior wall of the house, so this wasn’t a minor issue.

Crack-house

After seeing this we called off the home inspection.  My client said they’d still like to buy the house if the seller would fix this issue, understanding that it would likely affect him in the future when he tried to sell.  I explained that what would be required would be an engineering report to determine what is causing the crack in the foundation and then based on that the recommended remediation with a final engineering report that states the ‘site is stable’ as that would be required by any insurance carrier to issue a policy and he would need that to get financing.  So he asked me to request that the seller do those actions and also give him 5 days after that was completed to finish his home inspection.  All very reasonable to request.

I sent an email the next day to the listing agent with the info, the photos I took and the request from my client which was then sent to the seller.

Forget the Crack – Why Did You Lift the Carpet?

The following day I got an email from the listing agent’s transaction coordinator who started out by asking why the carpet was lifted up, stating that it was just professionally installed and then asking if it was placed back the way it had been.  Seemed kind of odd that with the foundation issue this was what they had attention on.  Then she gave me the response from the seller which was that only lender required repairs would be considered after an appraisal was done (lender being the one doing the loan for my client’s purchase).  In other words, the seller wanted the buyer to pay for and have an appraisal done and then they would review what the appraisal required in the way of repairs and would consider those.

My client said that they didn’t say they would do the repairs, just that they would think about maybe doing them and I said he was correct.  He had a valid point which was that if he proceeded he would be paying for the appraisal with no guarantee the deal would ever close for him – so he asked that I propose to have the seller pay for the appraisal and then if the deal closed he would reimburse the seller for that cost at closing.  Again, a very reasonable request.

However, the reply we got back is that the seller never pays for an appraisal.  I wrote back that in this situation the only way the house can be sold is by having it remediated so that a buyer getting a loan will be able to get insurance or that the price would have to be dropped significantly (like $100,000 or more) for a cash buyer to be willing to purchase it.  None of that had any effect and so my client decided to cancel the contract.

Make Sure That Carpet is Back Down (Covering the Crack)!

I emailed the listing agent on a Wednesday about the cancellation and sent over the cancellation form on Thursday morning.  The response I got when I sent it was a request that the carpet be put back in the same condition it was found and I personally went over that afternoon and placed the carpet in the master bedroom back down as best I could.  I took photos and emailed the listing agent that it was done and included the photos.  The response I got was that they would send over a ‘field agent’ to inspect it.

The next morning I asked if we would be getting the form back with the seller’s signature so that we could get my client’s deposit back and I got a somewhat nasty email back about how the carpet was not in the same condition as when we first saw it and that it MUST be left in the condition it was found.  When I forwarded that to my client his comment was that it seemed they were more concerned about covering up the crack than they are about the crack being there.  We met at the house and together made sure the carpet in the bedroom and closet was back the way it had been, checking that it was tacked down all around the walls with our fingers.

When I arrived at the house there was another agent waiting for a client to show up and I informed her of the crack in the foundation under the carpet that we had found.  She thanked me for telling her and then informed me that her client had already attempted to purchase 2 foreclosed homes from this same (very large and well-known) seller and had to cancel in both cases due to undisclosed major issues.  She also told me that in the first case the listing agent had specifically told her not to send them any reports about the issues she found and that in the second case she also saw that the issues found (and reported to the listing agent) were not disclosed in the listing after they cancelled and that the property did sell to someone else.  She told me that her client had been pregnant through all this and then her client showed up a few minutes later carrying a newborn.  They were both very thankful that I was there and told them what had happened and I was very glad to have spared this new mother from another horrible situation.

After I got back from the carpet ‘fixing’, I sent a somewhat angry email to the listing agent that the carpet was now back to how it had been and pointed out how the crack was undisclosed and hidden and that I wanted the signed form back immediately and got it back within 2 hours.

Still Not Disclosing the Crack

Then I looked in the MLS and noticed that the house was put back as being Active on the day I emailed the listing agent about the cancellation (prior to any paperwork being sent) and that there was no disclosure in the listing or the attachments about the crack in the foundation.  I saved a copy of that.

It took a few days to get the title company to send the deposit back but once they did and my client deposited it, I sent an email to the broker of the firm that had this listing with the subject line “Request for correction of nondisclosure/concealment of property condition for (property address)”.  I got a call a few hours later from an agent at that broker’s office informing me that he was the assistant to the broker and was calling me because the broker was in training all day and didn’t want to wait to reply – it was a very interesting call.

After taking exception to my saying that they had ‘concealed’ the foundation issue and telling me that they knew nothing about it, he gave me some very valuable information that explained a lot.

Dirty Little Secret Confirmed

He told me that they had no knowledge of the crack and only found out about it when I informed them.  He said that this particular seller has people they hire to do things like lay carpet and the listing agent doesn’t even necessarily go to the property when that type of service is being done.  This could very well be true and it could be true that the carpet layers either didn’t say anything or have been informed they are not to say anything about an issue they find.  He also confirmed during this part of the conversation that they are not allowed to accept any property reports from any agents or buyers and that this holds true for all the major lenders and others they get foreclosure listings from.  That would fit in with the ‘plausible deniability’ scenario I described in the last article and confirms what I read online when I was previously looking into the possibility of doing foreclosure listings.

He also told me that when there is a cancellation, they have to put the property back on the market immediately and are not to wait until the cancellation form is signed.  Interesting how that works when they are also not allowed to change the MLS status when all the terms for a purchase have been agreed upon and we are just waiting for the seller to sign the contract!

Then I brought up the issue of how they put the status back at Active with no disclosure in the MLS at all about the crack in the foundation.  He told me that the listing office/agent cannot put anything in the MLS until they get approval from the seller and they were just waiting to hear back from the seller on how they wanted the wording in the MLS (this was 8 days after they changed it back to Active).  I told him at that point that they could have informed the seller that they couldn’t change it back to Active until they had the wording about the foundation crack as they would be in violation of the law about “disclose any known facts that materially affect the value of the property” and I was then told what I had expected the reason for all this was – they don’t want to risk losing this listing and possibly even losing all this seller’s listings in the future (since a majority of their business was foreclosures).

I could tell that he probably was aware that the way they were operating was at best unethical and at worst illegal/criminal but I could also tell I would not get anywhere with him on this so I didn’t press it any further.  However, I did notice that within a few hours the listing had been revised to include a sentence in the Realtor Only Remarks section to ‘contact listing agent for important disclosure information’ and as of today it is still not under contract – so I was at least able to get that accomplished.  Funny how they had been ‘trying’ for 8 days to get the answer from the seller about the wording for the MLS and within a couple hours of my pointing out that was they were doing was illegal they were able to get that accomplished!

Summary

So here is my take on the situation, even though this is by no means stating that this is true for all foreclosed properties, lenders or listing offices/agents that specialize in foreclosures:

  1.  The large names in the foreclosed property field (lenders, government-sponsored entities) appear to have a system in place where all those involved in the sale of foreclosed properties can say they ‘didn’t know’ about property condition issues.  I keep hearing on foreclosed properties (and ‘flipped’ properties) that there is no seller’s property disclosure because “the seller never occupied the property”.  I checked with the Florida Realtor’s legal hotline about this and was told that in Florida there is no legal requirement for a property disclosure form but that the seller and listing agent are required by law to ‘disclose any known facts that materially affect the property’.  So even though they may hide behind the ‘never occupied the property’ excuse, it doesn’t let them get away with concealing or withholding information about the property.  But then if they have a system set up where they have agents refuse to accept or even delete reports sent to them, they can justify to themselves that they didn’t really know.  Hope they all sleep well at night (NOT).
  2. Those same large names rope in some agents and brokerages by feeding them lots of business which those agents and/or brokerages become reliant upon and then out of fear of losing a large portion of their business start to sacrifice their integrity and forget that what they do affects good people who are just trying to buy their next home.  It is not all agents and brokerages that specialize in foreclosures who fall prey to this as I have had an experience with one brokerage who was honest and ethical and where the listing agent actually returned my calls and responded to my emails.  And I have had and heard of a few deals where the seller acted more ethically. But in the examples I gave in this and the previous article, the listing agent did not once respond to my emails or calls after getting to contract even though I know they received them, and the seller in the 2nd one was a butthead.
  3. There is an attitude among the big names and some of the brokerages and agents that this is just the way things are and there’s nothing that can be done about it and we just have to accept the way these things go.  I’m sorry but that’s just a bunch of B.S.!  Would these same people find it acceptable if they were the buyer and were being dealt with this way?  Would these brokerages or agents let this happen to buyers that they represent?  Would the big name lenders and government-sponsored entities just sit back and accept that people got loans under false pretenses but didn’t know about it because they don’t do their own accounting?

At this point my recommendation to my clients will be that they avoid purchasing any foreclosed properties because not only are those involved on the selling side not necessarily trying to do what is right for both sides, in some cases what they are doing (or not doing) can create a bad situation for the buyer of the property without the buyer even knowing about it until sometime in the future.

Until this area gets cleaned up in the future, if it ever does, you should not take the risk unless you can suffer a potential future loss without it having a negative effect on you.

Thanks for reading all the way through – I realize this was very long but it was something I felt very passionately about telling you about and I hope you never have to go through what these (or other buyers in similar situations) went through.

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