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Buying Property From a Seller Who Doesn’t Own it Yet

April 15, 2019

By: Gary M. Kaleita

The Central Florida real estate market is still relatively strong. As a result, some speculators have been placing single and multiple properties under contract for purchase, only to offer to sell the property that they don’t yet own to a Buyer for development. It is not unusual nowadays for this scenario to occur when the proposed development is a residential subdivision.

Sometimes the speculator adds value to the property by obtaining development approvals while the speculator has the property under contract. Sometimes the speculator wants to “flip” the property without actually purchasing it, by assigning its purchase contract to the Buyer who then closes with the Owner. Other times the speculator is willing to close on the purchase with the Owner and then deed the property to the Buyer, which increases the Seller’s transaction costs.

Whatever the goal may be, here are a few issues for the Buyer to consider:

1. Does the Seller actually have the property under contract to purchase? The public records will not disclose that (unless the Seller and the Owner have recorded a memorandum of their contract). It is not unusual for the Buyer to request a copy of the Seller’s contract with the Owner, even if it has to be redacted to remove confidential information like the purchase price the Seller agreed to pay to the Owner. This will also enable the Buyer to verify that the time periods for the performance of various activities under the contract with the Owner are compatible with those to be established in the new contract between the Seller and the Buyer, such as periods associated with title and survey review, due diligence inspections, obtaining of entitlements, and closing. The Buyer should definitely get a copy of the Owner’s contract if the Buyer is contemplating accepting an assignment of that contract and closing with the Owner, as opposed to closing with the Seller after the Seller closes with the Owner.

2. Does the Seller have the right to grant the Buyer access to the Owner’s property for the Buyer’s due diligence activities? The Buyer’s contract with the Seller should include a representation by the Seller that this is the case. The Owner may not know that the Seller is contracting to sell the Property to the Buyer, and may be confused to find representatives of the Buyer doing investigations on the Owner’s property.

3. All contracts contain multiple representations and warranties by the Seller. These should be carefully reviewed and modified to reflect that the Seller is not yet the Owner. The representations should include the following additional affirmations or covenants by the Seller, to the effect that:

  • The Seller does have the property under contract for purchase, identifying the Owner and the property;
  • The contract with the Owner is in full force and effect, and no event has occurred that would constitute a default under that contract by the Seller or the Owner;
  • The Seller is not aware of the existence of any defenses to the enforcement of the Seller’s contract with the Owner; and
  • The Seller will deliver to the Buyer copies of any notices sent by Seller to Owner or received by the Seller from the Owner.

Can the Seller include all the representations that would typically be provided by the Owner? Probably not. Has the Seller conducted any due diligence already that would enable the Seller to make representations about the Owner or the Property, even if they are only made to the best of the Seller’s knowledge? Probably so. Any gaps will be the kinds of Owner representations that are probably customary, but cannot be made by the Seller (or are being made only to the Seller’s knowledge), so present potential risks for the Buyer.

4. If the Seller fails to close on the purchase of the property on account of the Seller defaulting on the contract with the Owner, it should constitute a default by the Seller under the contract with the Buyer. If the Seller fails to close on the purchase of the property on account of the Owner’s default, what should happen? At a minimum, the Buyer should be able to terminate its contract with the Seller and recover the Buyer’s deposit. It may be possible to negotiate with the Seller for the Seller to reimburse the Buyer for all or some portion of the Buyer’s due diligence expenses, but the Seller is not likely to agree to this because it may have to absorb its own due diligence expenses. However, if the Owner has defaulted, the Seller will have remedies against the Owner to recover damages and/or to obtain specific performance of the Owner’s contract. Perhaps the Buyer can require the Seller to pursue those remedies so as to make the Buyer whole if the Buyer would prefer not to walk away from what was expended in the deal. Perhaps, if the Seller has the right of specific performance against the Owner, the Buyer would prefer to have the Seller assign the contract to the Buyer so that the Buyer can pursue that remedy against the Owner.

5. One final consideration is whether it may be possible to provide for the Seller to close on the purchase from the Owner, but to name the Buyer as the Seller’s designee for the purpose of the Owner deeding the property (and conveying entitlement, etc.) directly to the Buyer at closing, instead of to the Seller. This avoids the need for two consecutive deeds, and has some complicating factors, but can yield savings in transaction costs since it would not be necessary to pay duplicate documentary stamp taxes (for two deeds) and duplicate insurance premiums (for two title insurance policies). It should be noted, however, that even if this savings is achieved, the Seller is no doubt making a profit on the transaction, so the Florida Department of Revenue considers that profit subject to its own documentary stamp tax. As such, if this approach is used the Seller should be required to pay that tax.

If you have any questions about buying a property that is not owned by the seller yet, please contact Gary Kaleita at Gary.Kaleita@lowndes-law.com.


Gary

With more than 30 years of experience in real estate law, including over 20 years as a Board-certified expert in the field, Gary Kaleita has acquired the ability to navigate the complexities of sophisticated real estate deals with relative ease.


Gary has a wide variety of experience in real estate development, finance and transactions, condominiums, property owners’ associations, commercial leasing, commercial lending, and title insurance.

Gary enjoys a reputation for anticipating and avoiding problems, rather than merely reacting to them. He has years of experience handling purchases, sales and financings of commercial and residential projects, including office, industrial, retail, multi-family, single-family, condominium, resort, hotel and golf course properties. Gary has prepared and negotiated contracts for sale and purchase, performed due diligence investigations, and handled all aspects of closings, including issuance of title insurance and legal opinions. He has also performed tax free exchanges (both forward and reverse) under Section 1031 of the Internal Revenue Code, and has handled closings for housing revenue bond financing transactions with the Florida Housing Finance Corporation and various local housing finance authorities.

In the area of real estate development, Gary has assisted developers in obtaining land use approvals, plat approvals and permits for various developments from a number of jurisdictions in Central Florida, including planned developments (PD’s) and Developments of Regional Impact (DRI’s). He has drafted and negotiated complex land use documents, including development agreements, cost-sharing agreements, declarations of covenants, conditions, restrictions and easements. He also has experience in mall and shopping center developments, including outparcels, and has assisted developers with the selection, formation and operation of business entities, including commercial and residential property owners associations. He has extensive experience with the formation and operation of both commercial and residential condominiums as well.

In addition, Gary has established somewhat of a boutique practice by acting as local counsel to help out-of-state lenders, investors and law firms navigate the complexities of Florida real estate law. He is frequently engaged by large national and international law firms needing assistance on a variety of issues for their clients doing business in Florida. Gary regularly provides advice on Florida law and custom pertaining to purchase and sale contracts as well as loan documents, addresses local due diligence issues, answers questions involving titles, surveys and title insurance, and provides Florida legal opinions.

Not just another real estate lawyer, before pursuing his career in law Gary served as a U.S. Naval officer on active duty for 4 years in the Mediterranean Sea, first with a patrol gunboat squadron in Italy and then at a communications station in Greece. During this period he traveled extensively throughout Europe, the Middle East and North Africa. He believes his military experience is the source of the practical approach he has developed to problem solving.

Gary also took the initiative, after a homeowner in his own neighborhood was mauled by a Florida black bear in 2013, of researching what his homeowners’ association could do to limit the likelihood of future attacks. In the process, he became an expert in the subject of “bear-wise” communities and drafted a policy that his own homeowners’ association adopted, thereby becoming the first residential community to be officially recognized as bear-wise by the Florida Fish and Wildlife Conservation Commission (FWC). He has since written and spoken extensively on this subject, serves on the FWC’s Central Bear Management Unit Stakeholder Group, and has become a resource for FWC to educate other communities on the importance of bear-wise practices in areas of Florida containing black bear habitat.

Gary focuses on finding pragmatic solutions to complex problems, recognizing that clients want sensible and realistic advice in a timely manner so they can go about their business.

Chambers USA (2015)* reports that Gary has substantial experience acting as lender’s counsel and is acclaimed by market sources as an “extremely responsive, very practical and reasonable” practitioner.


*We make no guarantees or promises that the reader will realize the same or similar results

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