Why you should NEVER release money to a seller prior to closing

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If you learn nothing else from this post, learn this: Never release money from escrow to the seller prior to the closing.

Let me tell you a story:

On our first deal, my brother and I let an inexperienced broker talk us into offering to close in 30 days. 30 days is fine for a residential transaction, but you need at least 45 days (and, ideally, 60) to close on a commercial property like a 16-unit apartment building.

As the 30 days ticked down and we realized we’d need more time, we asked our broker to request more time from the seller. Now, ordinarily, if a reasonable seller sees you’re making a good-faith effort to move forward, he’ll grant you a extension. In this case, our seller was desperate for cash and therefore unreasonable, though it wasn’t clear to us at the time.

Knowing we were inexperienced, the seller requested the following, in exchange for an extension of the escrow period: That we release our $50,000 earnest money deposit from escrow to him. At that moment, we absolutely should have held firm and told him to take a hike.

Before telling you what we did, know this: Once you release funds from escrow to the seller, you’re never getting the money back, whether you close the deal or not. So releasing the money to him meant we were in, “hard”, with no way to get out without losing $50,000.

As you probably guessed, we agreed to release the money. Big mistake.

Later, before closing, the seller demanded $15,000 from us in order to finish the repairs necessary for the bank to lend against the property.

Ordinarily, as a buyer faced with a seller like that, you tell the seller to buzz off. But as a normal person of limited means doing my first deal, there was no way on earth I was walking away and lighting $50,000 on fire.

So I ended up loaning a deadbeat $15,000 as a fourth trust deed on his house in order to buy my first building, on top of paying him the agreed-upon price.*

Learn from my mistake: Do not release money to a seller unless you are strong enough to walk away from the deal and lose the money.

*I got the notice of foreclosure on his house a few months later. Suffice it to say that I never saw that $15,000 again.

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