I was trying to explain the concept of negative temperatures to my daughter the other day.

She’s 8-years-old.  I thought she would understand.

-2 is colder than -1.

-2 is less than zero.

“How could something be less than zero?” my daughter asked.

I suppose that’s a fair question.  We teach that “zero is nothing,” so if you have an integer that’s less than zero (which is not to be confused with the Bret Easton Ellis novel…), then it’s fair for somebody to ask, “How can something be less than nothing?”

While you and I might think that the math is simple, the idea of “less than nothing” could be significantly more difficult for an 8-year-old girl to understand, or, for an unfortunate, confused, entitled real estate agent and “investor” to grasp when selling his home at a loss.

This story brings us back to last summer when a client of mine purchased a small west-side home and, upon closing, the listing agent had some very interesting ideas about how to go about making up his financial loss on the property.

Perhaps we should take a quick pause here just to get some simple math out of the way.

870 – 850 = 20

Right?

“20” is a positive integer.  So if you had 870 apples and you gave 850 away, you’d still have 20 left.

850 – 870 = -20

870 is more than 850.  If you have 850 apples, you can’t give 870 away.  If you try to subtract 870 from 850, you are left with a negative.

And in the case of a real estate investment, if you owe more on the property than you sell it for, you’re going to make up the difference.

At least, in theory.

The following story demonstrates just how misguided some sellers can be in a market where a financial loss is looming.

I suppose that if I wanted to accept some responsibility for this, I should say, “I should have seen the end result coming.”

The process of getting this house sold came with some oddities and red flags.

This house had been on the market, off-and-on, for essentially two years.  The initial price was an astronomical $1,200,000, which made absolutely no sense, and it was listed for $899,900 with an offer date, then $1,179,000 again, then it was put up for lease, then it was leased, then the tenants left and it was listed again, and again, and again.

You know the drill.

I’ve told this type of story many times here on TRB but this is one of the few cases that I can remember where I actually sold one of these houses.

The house was listed for $899,900 in August and my client loved it.

She was looking for a condo townhouse but the opportunity to purchase a freehold in her price range was something that she couldn’t overlook.

It was clear that this was an investment property, having been initially purchased by the owner for $450,000 in 2016, renovated, rented, re-rented, and then finally offered for sale.

The listing history didn’t bother my client, who we’ll call Jane.  She was very pragmatic about it, simply saying, “I would buy this house in a heartbeat for $850,000.  I don’t care if it was listed for $1,200,000 two years ago, or if it’s been leased to three different tenants over eight years.  I know that I like it and I know what I would pay.”

So that was that.

I spoke to the listing agent, who we’ll call Ron, and told him that we had interest.

He was excited and told me to bring an offer, but I asked him, what his expectation was.

Call me a hypocrite, since I’ve long opined that I don’t like when agents ask me this question, but in a situation like this, where the property has been listed for sale for two years, it’s very different from asking an agent with red-hot listing that has a set “offer date” what they expect the home to sell for.

Ron was willing to play ball.  He said, “My strike price on this would be $850,000.”

That was perfect.

That was Jane’s number.

I called Jane and told her what Ron had said, and I asked Jane, “Do you want to try something lower and see what we can get?”

Jane said, “Honestly, I would be super happy at $850,000.  So if he’s in agreement, then let’s not risk blowing this up by trying to come in at $820,000, sign back-and-forth, so we can eke out an extra $8,000.”

We put together an offer for $850,000 and I sent it over to Ron.

Ron thanked me and sounded excited, and I waited to receive an accepted offer in return.

Only, Ron didn’t send back an accepted offer.

He sent a counter-offer for $920,000.

I called Ron and simply asked, “Ron, what the heck are you doing?”

Ron said, “Well, I’d really like to get $900,000 for the house.”

I said, “Ron, you told me earlier it was $850,000.”

He murmured, “Uh huh.”

I offered, “Not only that if you wanted $900,000 for the house, why wouldn’t you sign back at $900,000 instead of $920,000?”

He murmured again, thinking of something to say, but I interjected and said, “Ron, is this ‘negotiating’ on your part?”

He said, “Well, yeah, I mean, I owe a ton of money on this house.  I have a private mortgage.  I want to make some money on this in the end, I’ve owned it for eight years…”

I said, “Ron, how about this: I’ll talk to my client and we’ll send a revised offer of $700,000.  Then we can ‘negotiate.’  We can spend a week going back-and-forth, and maybe we land at $850,000, or maybe we don’t.”

Ron replied, “No, don’t do that.  It’s fine.  I’ll do the $850,000.”

I told Ron that I was pleased, and I said I would send over a fresh offer at that price.  Ron responded, “No, I can just accept the $850,000 offer you sent earlier,” to which I explained, “You can’t accept that offer because as soon as you provided a counter-offer, that original offer was null and void.”

Ron said that he understood, but I wasn’t sure that he did.

I had Jane sign a fresh offer for $850,000 and I sent it over to Ron.

Ron then signed the offer back at $865,000.

“Ron, what the heck are you doing?” I asked.

Ron replied,”Oh, yeah, huh, well, I mean I’m just running my numbers and I’m trying to make this work.”

“What numbers?” I asked Ron.

Ron said, “Well, I’m looking at the two mortgages that I have on this, and I need to get $865,000 to clear them.  I can’t sell the house if I can’t clear that, so your client needs to make up the difference.”

I explained to Ron, “What you owe on the house has nothing to do with what my client ‘needs’ to do, wants to pay, or will pay.”

Ron said that he understood.

I said, “Ron, I’m going to send you one more offer for $850,000, and if you accept it, great.  If you don’t, then we’re moving on.”

Ron said that he understood.

I had Jane sign a fresh offer of $850,000 and we sent it to Ron.

Ron then sent the offer back and guess what?  The Confirmation of Acceptance was signed!

Hooray!

Except, wait, one problem: Ron had struck out the 2.5%+HST commission payable to the buyer brokerage and replaced it with 0.5%+HST.

Say what you want about the value of a buyer agent, or my role in this, but the point remains:

You cannot change any terms and conditions of an offer and then accept it.

Because if Ron can change the commission payable to the buyer brokerage, then what’s to stop him from changing the price to $6 Billion and then accepting his own changes?

Amazingly, Ron, in his infinite wisdom, had gone onto MLS and changed the posted commission payable to the buyer brokerage from 2.5%+HST to 0.5%+HST just to ensure he was covering his bases.

“Ron, what the heck are you doing?” I asked him when I called him immediately thereafter.

“Yeah, oh, that.  Well, I figure if I can pay you a lot less, then I can make up what I need on this house.”

I told Ron that in my twenty years in the business, no cooperating agent had ever done what he just did and that it was wrong both ethically and legally.

Ron said, “Alright, okay, I get it.”

I asked, “But do you, Ron?  I feel like we’re having the same conversation over and over.”

Ron replied, “Send me a fresh offer, terms and conditions as you like,” and it will be accepted.

So I had Jane sign a fifth offer and we sent it over to Ron.

This time, he accepted.

As is, no changes, legally-binding, the deal was done.

From there, we didn’t have any hiccups and it seemed like the very odd encounter with Ron as we tried to purchase the property was simply a one-off.

But two days before closing, Ron emailed me an Amendment and it was bizarre.

The Amendment sought to have the seller gain access to the $50,000 deposit funds the day before the transaction was scheduled to close.

I had never seen anything like this.

The entire reason why a deposit is held in trust with a listing brokerage is so that the seller can’t gain access to the funds without one of three things:

1. Court order
2. Mutual release
3. Completion of a transaction

Now, Ron was seeking to get the $50,000 before the transaction was closed?

I called Ron and asked him what this was – also asking why he didn’t call me to discuss, let alone why he left this until two days before closing, and Ron’s answer was simple:

“I need to pay off my first and second mortgages tomorrow because the next day, I owe a mortgage payment, and the deal closes, and I don’t have the money.”

Oh.  My…

Here’s where things went from odd to utterly bizarre.

I said to Ron, “So you’re essentially looking to ‘borrow’ the deposit funds from my client, putting her at risk and removing a lawyer of protection for herself and her money, so that you can pay off your debts?”

Ron said, “No.  That’s not it at all.”

So I asked for an explanation, and Ron said, “Your client can’t close this deal unless the mortgages are discharged.  So she has to allow the funds to be released ahead of time so the mortgages were discharged.”

Well, that was an interesting way of putting it.

It was like saying, “I didn’t punch you; my fist did!”

I asked Ron, “Are you trying to say that this is my client’s problem?”

Surprisingly, he said, “Yes, it is.”

He added, “What you don’t seem to understand is that the purchase price of this house at $850,000, minus the real estate fees, taxes, legal fees, and mortgage discharge fees, is more than what is owed on the house.”

I asked him, “Ron, if you paid $450,000 for the house in 2016, then why and how do you owe more than $850,000 on the house?”

This was supposed to be rhetorical, but Ron took the bait.

“Because I refinanced!” Ron shouted.  “Because I’m an investor!  I’m using the money to work on other projects!”

I asked Ron, very calmly, “Is this also my client’s problem?”

Ron said, “You’re not understanding.  None of this matters.  The only thing that matters is that if your client doesn’t release the $50,000 deposit, then the mortgages aren’t discharged, and she can’t close.”

That’s when I said, “Ron, if the mortgages aren’t discharged and my client can’t close, then you’re in breach.”

Shockingly, Ron said, “No, your client is in breach!”

I can still picture the day, time, and place of this conversation.  I was standing in my office on a hot, summer day, and Lindsay was watching me on the phone, whispering, “You should see your face right now.  I’m worried your jaw is going to touch the floor.”

But I was speechless.  Absolutely speechless.

Ron was arguing that my buyer was in breach because she wouldn’t allow him to gain early access to a $50,000 deposit, held in trust, to pay his debts on the property?

It was asinine.

I said, “Ron, if you don’t find a way to close this deal on Friday then you’re in breach and you’re responsible for every penny of financial hardship that my client endures.  Her hotel stay in the interim, her extra legal fees, and associated fees with respect to her mortgage.”

Ron shot back, “No, if your client doesn’t release the funds, then she is breach, and I won’t close on the sale, and then I’ll go to court and get her deposit – which I will get.”

At this point, I realized that Ron was either crazy or he was so distressed with his own personal finances that he had lost sight of logic and reason.

“Ron, you’re over-leveraged.  That’s what’s going on here.  This isn’t my buyer’s problem.  This is a you problem, and you alone need to fix it.”

Ron laughed.  Over and over.  His conviction made me think that he believed what he was arguing.

“Ron, you purchased the property for $450,000 and you owe $850,000.  That’s because you’ve used the property as an ATM.  This has nothing to do with the buyer of the property,” I said.

Ron told me, “This is how it works in these situations.  Your client needs to help mitigate.”

I interjected, “Okay, so what happens in a situation where you owe $1,100,000 on this house that you sold for $850,000?  Then what?”

Ron said, “I wouldn’t have sold.”

I said, “No, but Ron, seriously, entertain the hypothetical, what happens then?”

Ron said, “I never would have sold.”

I told Ron, “Okay, so in a different situation, where somebody else owns this house, and they owe $1,100,000 but they sell it for $850,000 they alone are responsible for that loss and it has nothing to do with the buyer.  You think this situation is different because you have a $10K, $20K, or $30K shortfall here and there’s a $50,000 deposit which can help you out.”

Ron said, “But the money is there.”

I told Ron, “It’s not your money.  Not until the deal closes.  If you need money to make up the shortfall, then you use your money.”

That’s when Ron shouted, “I don’t have any other money!”

This much was clear.

He said, “Not in my chequing, not in my savings, not on my line of credit, I don’t have it!”

I told Ron, “Respectfully, Ron, that’s what’s called a ‘you-problem,’ and it has nothing to do with my buyer and her $50,000 deposit which is safely being held in trust and will only be released when the sale closes.”

Ron hung up on me.

I called Jane’s lawyer to explain what had just transpired, then I called Jane.

Unfortunately, the deal did not close on Friday as planned.

The deal closed on Monday and I don’t know why, how, or what happened, but I didn’t care.  I just wanted to ensure that Jane was able to get into her new house, that her $50,000 deposit was protected, and that she was on title with a registered mortgage, and that Ron was no longer financially tied to the property.

All was now well.

Just to satisfy the 1% of my mind that wondered whether I had misread this situation, I spoke to our in-house legal counsel, my personal lawyer, and my mortgage broker, and all three of them expressed bewilderment by this situation.  The consensus was, “People will do crazy things when the financial pressure gets to them.”

But I wonder what another agent would have done?  And another buyer?

What could have happened in a situation like this if the cast of characters were different?

Sometimes, you just have to realize that a seller being unable to close on a sale isn’t the worst-case scenario…