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Friday, August 23, 2013

Opportunistic Client Hypo

A poster on the DIRT listserv posted a question yesterday that I am going to give my Real Estate Transactions students this semester.  This kind of proposal from a client is not unusual -- I had a longtime real estate developer client and friend propose that I help him with exactly the same scenario.  We talked through a few possibilities, I explained all the legal risk to him, and he either dropped it or found another lawyer more eager to help him.  Anyway, its (a) very real, (b) fraught with legal and ethical issues, and (c) therefore a great problem for real estate students to debate.  Here is the unedited post to DIRT:

Hello all,

I have an opportunistic potential client (PC) with the following situation: 

1)     PC knows a seller (of improved property) who is willing to take $500k for his property.

2)     PC knows a potential buyer who is willing to pay $850k for said property.

3)     PC would like to somehow give the seller and buyer what they want while taking the extra $350k off of the potential buyer’s hands.

Conundrums: 

1)     PC doesn’t have $500k (or even a down pymt to get financing) in order to acquire title and flip the property.

2)     If either the seller or buyer find out about the other, PC gets cut out.

3)     PC is not a real estate agent/broker.

Questions: 

1)     Is there a way for PC to utilize potential buyer’s funds to get title to PC and flip to potential buyer? Hypothetically (and as an academic exercise, of course), PC wants to have two closings – first, one which the potential buyer closes on the property despite PC’s not having title yet, and then, another closing in which the seller sells the property to PC. Presumably, PC’s after acquired title would immediately pass then to the potential buyer. This is obviously problematic in reality because a title commitment would show the potential buyer that PC is not the record owner (yet) and would likely force the potential buyer to run away before closing, go directly to the seller… and subsequently sue PC for fraud.

2)     On that note, is there any way a title company would issue a title commitment based on a potential record (i.e. showing the name of the PC)?

3)     After pointing my finger and yelling “FRAUD!” a few hundred thousand times, I considered offering the idea of an assignment (of a PSA between PC and seller), but I can’t think of any way to avoid the potential buyer learning about the purchase price and subsequently cutting PC out. Any ideas?  

4)     In the interest of PC’s pocket books, Adam Smith’s free market, and my license, is there a way to effectuate the PC’s wishes… ehem… legally?

Tanya Marsh

http://lawprofessors.typepad.com/property/2013/08/opportunistic-client-hypo.html

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