Protect Yourself From Sellers Who Sign Multiple Purchase Contracts

Sometimes sellers are motivated to sell their property fast for cash and that can lead a homeowner signing sales agreements with multiple buyers for the same property.

Here’s a list of things you can do to protect yourself from a seller who signs more than one sales purchase contract.

• Be aware of the title recording laws in your state
• Buy through a title or escrow company
• Use a real estate attorney
• Buy from an established wholesaler
• Close the transaction ASAP

 

We’ll explain each of these risk-mitigation strategies below. There are also state statutes that deal with this exact problem but they vary from state to state.  Check out our chart below to see which states adopt which of the three statutory types.

7 Steps to Mitigate Your Risk of Losing a Property to Another Buyer

When circumstances lead to a property owner signing sales contracts with more than one buyer for the same property at the same time (which may range from innocent ignorance up to full-on fraud), it’s often a race to record your transaction.

These occurrences are rare, but unfortunately, they are impossible to avoid 100% of the time even if you are conscientious and careful.  An immoral seller can take advantage of buyers, regardless of the diligence by the other parties to the transaction.

Here are seven ways that you can mitigate this risk:

1. Be Aware and Vigilant.

Just being aware of how the title recording laws work in your state will go a long way to help you know what to be on the lookout for.  If you’re on the front lines with highly motivated or unscrupulous homeowners, know your state’s laws, and always record your transactions promptly (most escrow companies these days can record electronically and provide you fast confirmation).

2. Maintain a Strong Rapport with the Seller/Owner.

Whether you’re buying directly from the homeowner, or through a wholesaler, stay in contact with them to get assurances that everything is on track and that nothing ‘smells fishy’.  A seller that suddenly goes dark on you during the escrow period is a yellow, if not red, flag.

3. Buy Through a Title/Escrow Company.

If you happen to buy a property outside of a title/escrow company (or attorney in some states), you are inherently taking on more risk, plus it’s on you to make sure you get that notarized deed recorded quickly.  In addition, by going through a title company and obtaining extended coverage title insurance, you may have another avenue (other than the potentially judgment-proof former owner) to recover your losses through.

4. Use a Real Estate Attorney to Advise You on Your Transactions.

It can get pricey to have your attorney review and guide you on every single transaction, but if you are just getting started in real estate, you may want to do just that for at least the first handful of deals.  After that, you may choose to involve your attorney only on deals that are unusually complicated or where you get the feeling that something in the deal is going sideways.

5. Buy from an Established Wholesaler.

If you buy from an established wholesaler, these problems are even less likely to be an issue but don’t be afraid to check on that wholesaler’s reputation before closing a deal with him/her. Savvy, experienced wholesalers tend to know how to maintain stronger rapport with their clients/sellers, and will be more adept at sniffing out a seller who might be going sideways on a transaction.

Still, it is smart to ask the escrow company and/or other investors about their experiences with that wholesaler to gain comfort that you’re working with someone who is ethical and aware of the state statutes.

6. Close the Transaction Promptly.

In general, the sooner that you close on a property, the better the chance that you will get a good title to that property.  So rather than delaying that purchase for a few extra days so you can line up your contractors or tenants, a Good Practice would be to close on the property as soon as the title work is ready.

7. Record Even Earlier – Before you Close the Transaction

Another good strategy, if available to you in your state, is to record a memorandum, once you are under contract directly with a homeowner, which provides constructive knowledge to all others that you have an equitable interest in the property.  This typically has to be done with the owner’s consent, so consider having the owner sign off on the memorandum as part of the purchase agreement documentation.

Who Gets the Property According to Each State’s Statutes

Sometimes the buyer who records their purchase interest with the local County Recorders Office (or similar agency) prevails over subsequent buyers, and sometimes they don’t.

. There are 3 main statutory program types that the 50 U.S. states have chosen to follow, and they are:

• Race Statutes
• Notice Statutes
• Race/Notice Statutes

Here is a short explanation of each of these 3 types of statutes:

 

1. Race Statutes

In a nutshell:  The first one to record their transaction wins, regardless of whether that party had actual or constructive notice that there was another buyer transaction. This is also known as the “Race to the Courthouse”.

Pros: This statute encourages parties to record their interests quickly.

Cons: It protects a party who had actual notice of a prior conveyance, but just happened to be the first one to record it. Because of this downfall, very few states have adopted this type of statute.

States currently with Race Statute:  Delaware, Louisiana, & North Carolina

 

2. Notice Statutes

In a nutshell:  A subsequent bona fide purchaser wins.

Pros: It rewards a subsequent purchaser as long as he/she paid a fair price (not a nominal one) for the property and had no actual or constructive notice of prior conveyance.

Cons: If the subsequent bona fide purchaser doesn’t record his/her interest, the first buyer may be unaware of the subsequent purchaser and could make improvements to the property that would be forfeited to the subsequent purchaser.

States currently with Notice Statute:  Alabama, Arizona, Connecticut, Florida, Illinois, Iowa, Kansas, Kentucky, Maine, Massachusetts, Missouri, New Hampshire, New Mexico, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Vermont, & West Virginia

 

3. Race/Notice Statutes

In a nutshell:  A subsequent bona fide purchaser wins.

Pros: All buyers are incented to record their interests promptly, which leads to more complete and accurate property records.

Cons: A subsequent bona fide purchaser, who may have done nothing wrong other than not be the first one to win the recording race, will not prevail against the party that previously recorded.

States/Districts currently with Race/Notice Statute: Alaska, Arkansas, California, Colorado, District of Columbia, Georgia, Hawaii, Idaho, Indiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New York, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming

 

Real-Life Example: A Seller Signs Two Contracts and Doesn’t Tell Anybody

You meet with a motivated seller for a property he owns.  During the negotiations, he mentions that he has several other offers and uses that information to try and push your price up and get you to close quickly.  You see value in the property and agree to a price and terms with the owner.

He says he needs to close fast to pay off some imminent debts, so you sign a purchase contract with him at a fair price.  You open up escrow at your preferred title/escrow company and prepare for your closing that’s set for 10 days from now.  That’s a pretty fast closing timeline, but not fast enough.  Why?

Well, it turns out that your seller took a call from one of the other cash buyers right after you left his house with your signed contract.  Investor #2 agreed to come up to a price that was $2,000 more than your contracted price and was willing to close in 8 days rather than 10. 

The seller, out of either ignorance or immorality, doesn’t mention to Investor #2 that he already executed an agreement to sell the property to you.  He only sees an opportunity to make a much needed $2,000 additional cash on his home.  He signs a written contract with Investor #2, who then goes off and opens escrow with his preferred title/escrow company, which happens to be a different one than yours. 

Can you see where this is going?

Investor #2 closes his escrow on the 8^th day when his escrow company records the deed from the seller to him.  Unbeknownst to you, you close your escrow on the 10^th day, as agreed, and your escrow company records your transaction. 

Guess what?  By closing his transaction, and without knowledge of your escrow, Investor #2 just received title to the property that is free and clear from claims by you!  And this would hold true in all states, under each statute. 

This subsequent purchaser who paid a fair price (not a nominal one) for the property, had no actual or constructive notice of prior conveyance, and recorded the conveyance prior to you, would have met the various tests to win in all 50 states.  

Specifically, for Arizona and other “notice” states, since Investor #2 closed the transaction without any knowledge of your prior, executed contract with owner, that would have been sufficient to prevail over you, regardless of who recorded first.

My Own Real-Life Example of a Seller that Signed Two Contracts

The above scenario almost happened to one of my companies on a home in a pricey and exclusive Arizona neighborhood.  We negotiated and executed a written contract with a well-educated homeowner, who was a retired attorney (not a real estate attorney, however, but certainly was educated in basic contract law). 

We opened escrow on the property and started our due diligence.  Along the way, we checked in with him several times prior to closing, and on one occasion, he mentioned matter-of-factly that we didn’t need to proceed to closing because he subsequently signed a contract with a 2^nd buyer, since they were willing to pay more than we offered. 

Whaaaat??!!

We immediately confronted him and tried to tell him that what he was doing was wrong, not just ethically but also legally.  We believed that he was a good guy, but we had underestimated how much financial pressure he was feeling at the time. 

We got him to swiftly obtain a meeting with his own attorney, and he allowed us to join the meeting to sort it out.  We arrived at his attorney’s offices, expecting to encounter a brash attorney who would be aggressively defending his client’s dubious actions.

I’ll never forget what the seller’s attorney did after hearing the sequence of events from his own client.  He turned to the seller and said “What the hell were you thinking, John? You can’t sell the same house to two different buyers!”

“What the hell were you thinking, John? You can’t sell the same house to two different buyers!”

Thankfully, with his attorney’s recommendation, our seller went back to the other buyer and let them know what had happened – that it was already under contract with us when he signed the contract with the other buyer.  Now that the buyer had knowledge of our live contract, even if he refused to back away and raced to close the deal and record the deed, we would have had a valid claim against him.  

Recall that Arizona is a ‘notice statute’ state, meaning that the transfer of real property is not valid to third parties unless the third party had actual or constructive knowledge of a preceding transfer (such as appropriate document/deed being recorded in the County Recorders Office) (Arizona Revised Statutes paragraph 33-412).

Fortunately, we had remained in contact with our seller during the escrow period, which is how we found out that he had tried to use our contract to negotiate a higher offer from someone else. 

We found out accidentally, by him candidly telling us that he found a buyer willing to pay more than we were.  Thank goodness that the owner was honest, if not thinking clearly, during that difficult period of his life. 

Had both deals closed and recorded without either buyer having knowledge of the other contract, Buyer #2 would have prevailed over us, since they would have been a subsequent bona fide purchaser. This seller was broke and over-extended at the time, so chasing after him legally would have netted nothing except for additional costs.

Additional Examples of a Property Seller Signing Two Separate Purchase Agreements

Let’s reshuffle the deck and explore this concept further… 

For illustration purposes, let’s now look back at the original scenario, where you had a signed contract to close the deal in 10 days, but the seller signed another contract later that day to sell to Investor #2 for $2k more and close in 8 days.  His deal recorded before yours, leaving you with a potentially big problem.

Here’s how each state’s statutes would affect the outcome:

 

Did it matter that Investor #2 recorded his deal first?

Race States: Yes, because the first one to record wins.

Notice States:  Actually, no. What mattered was that the subsequent buyer did not have actual or constructive knowledge of your transaction with the homeowner when Investor #2 closed his/her transaction. 

In fact, even if you then recorded your deed prior to Investor #2 recording the deed, Investor #2 still prevails as a bona fide purchaser, since you didn’t record prior to their purchase. 

Race/Notice States: Yes. Since his deal recorded before yours, and he didn’t have notice of your deal, then this makes Investor #2 the winner.

 

What if you had closed in 7 days and recorded your deed that same day?

Race States: Then YOU would win since you recorded first.

Notice States: By the time Investor #2 closed his transaction on Day 8, your deed would have already been recorded on public records, so you get the property, and Investor #2’s only recourse would be to go after the seller. In this scenario, Investor #2 is not a bona fide purchaser, as your recording prior to their purchase provided constructive knowledge.

Race/Notice States: same as “Notice States” immediately above.

 

What if we altered the scenario as follows:

You were rushing to leave town for a 3-day weekend (Friday – Sunday) and to have peace of mind that this deal was done, you decided to pay the seller directly, in exchange for a notarized deed, on Day 7, which was a Thursday.

Your title company had sent you a ‘clean’ preliminary title report, so you were confident that the title was insurable.  But the seller really needed the cash and was pushing you hard to close early (this pressure is not unusual).

You agreed to meet up with him at a bank on your way out of town, and give him a cashiers check for the purchase price, in exchange for his notarized deed.

You then continued on your long weekend, knowing that you helped the seller out of a tight spot. You enjoyed your weekend and recorded the deed when you returned to town on Monday morning (Day 10).

No problem, right?

Race States: Big problem! Investor #2 recorded on Day 8 (Friday) and therefore wins.

Notice States: Big Problem! Having the notarized deed is not the deciding factor here – recording it for the public to see is.  By your waiting until the following Monday to record it, Investor #2 (or anyone else, for that matter) would not have had constructive knowledge of your transaction, and as long as they didn’t have actual knowledge of it either, Investor #2 would get to keep the property.  Had you recorded your deed on Day 7, you would prevail over Investor #2 as they would have had constructive knowledge when they closed on Day 8.

Race/Notice States:  Big Problem!  Not only did Investor #2 not have notice of your deal, but they also recorded several days before you, so they win the property.

Conclusion

Although the likelihood of encountering this type of issue for many investors is fairly low on any one deal, the potentially damaging impact it can have is massive.  As I have found out, if you do enough deals, these issues surrounding constructive notice and the race to record deeds will rear their ugly heads at some point.  It’s best to be prepared for them, by clearly understanding the statutes in the states you operate in and taking heed of the above recommendations, in conjunction with seeking legal and other professional counsel.  Buyer Beware!