Protect Sellers

Protecting Sellers from Investor-Buyer Pitfalls
By Robert Muir, Attorney

Investor—or “flipper”—buyers are increasingly common in today’s real estate market. While they can represent legitimate opportunities, these buyers often employ complex purchase structures, unusual contract language, or low earnest money deposits that may expose sellers to unnecessary risks. The following recent case study highlights the red flags agents and sellers should be aware of when evaluating an investor’s offer, particularly when no agent is representing the seller.

Case Study: A Seller Approached by an Investor

A seller was referred to our office to review a purchase agreement from an “investor” buyer. No real estate agent was involved in the transaction. After reviewing the standard CAR Residential Purchase Agreement (RPA) submittted, we advised the seller not to proceed due to several concerns that raised potential legal and financial risks.

Key Red Flags Identified

1. Complex LLC Ownership Structure
The buyers presented themselves as purchasing through an LLC, which another LLC owned. This layering of entities is unusual and suggests an attempt to shield personal liability. Further investigation showed that the individual signing on behalf of the LLC was not listed in the Secretary of State’s records.

2. “Or Assignee” Language
The buyer’s name in the RPA was followed by “or assignee,” implying the right to transfer the contract to another party without the seller’s consent. This tactic is often used in “wholesale” contracts to assign the contract while in escrow, leaving sellers uncertain about the true buyer. While the RPA contains assignment rules, inserting “or assignee” creates ambiguity over whether the seller’s consent is needed.  This should always be clarified in a counter offer.

3. Litigation History
A simple court record search revealed that the buyer had sued three sellers in recent months, apparently in disputes where sellers attempted to cancel contracts. While agents are not obligated to investigate a buyer’s background, advising clients to conduct basic due diligence—or referring them to legal counsel—can be prudent when red flags appear.

4. Low Earnest Money Deposit
The earnest money deposit offered was only 1%, far below the typical 3%. An unrepresented seller may not recognize this as unusually low, but such a small deposit makes it easier for a buyer to walk away with little consequence.

5. Misunderstanding of “As Is”
The handwritten language in the RPA stated that the property was being purchased “As Is.” While this clause is already standard in the RPA, sellers often misinterpret it to mean they can skip mandatory disclosures. Even in “As Is” transactions, sellers remain obligated to comply with all disclosure requirements.

Lessons for Agents and Sellers

This case ended well: the seller avoided entering into a potentially problematic deal and returned to the referring agent to list the property properly. However, many sellers mistakenly believe they can accept an offer and later rely on an attorney review period to cancel if issues arise. In reality, there is no automatic three-day right to cancel, as there is in some consumer contracts. If legal review is desired, it must happen before signing.

Summary

Investor buyers and flippers will likely remain active participants in the market, but their tactics can create significant risks for unrepresented sellers. By helping clients identify potential warning signs—such as layered LLCs, assignment clauses, low deposits, or a buyer’s litigation history—agents can provide critical protection and guidance. 

Encouraging sellers to seek legal review before committing to an agreement, especially when agents are not involved, helps ensure sellers avoid costly disputes and also helps agents fulfill their role as trusted advisors in an increasingly complex marketplace.

Robert Muir is a long-time member of SDAR’s Risk Management Committee.  He can be reached at muirlaw.com  

Disclaimer: This article is designed to provide accurate and authoritative information regarding the subject matter covered. It is offered with the understanding that the author and publisher are not engaged in rendering professional advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought.  Articles which appear in this publication are an informational service to members.  Their contents are the opinions of the authors alone and do not necessarily represent those of SDAR.