Why some Real Estate Deals Fail

When you’re in the middle of the buying process, there are several things that can crop up that might throw a monkey wrench in the works – also known as “deal killers.”

Despite the recent pickup in spring sales activity, the tough lending climate continues to kick up obstacles for both Buyers and Sellers — from obscure zoning problems to 11th-hour mortgage glitches.

One of the best ways to avoid killing a deal is to educate your clients about the whole home buying and selling process. While Buyers and Sellers might not be aware of common real estate mistakes, a good agent must identify potential issues and address them early so the transaction can proceed smoothly.

What are these deal killers that can sabotage a deal that otherwise looks like it’s on the right track? And what can you do to work past them?

Inaccurate appraisals

Industry professionals overwhelmingly named appraisals as the biggest obstacle they face in getting deals to the closing table.

As has been widely reported in the industry, rule changes under the new Home Valuation Code of Conduct have created a flood of out-of-town appraisers who can routinely undervalue properties. That, in turn, threatens Buyers’ mortgages, and makes them think they’re overpaying.

But some brokers are combating this by being proactive and have started providing appraisers with reams of information recent comparable sales and listings in the neighborhood, even pointing out conditions and special features that might impact the price, and about bidding wars or multiple backup offers, to prevent unexpectedly low appraisals.

Appraisers must verify the information provided by brokers, but agents can make that process easier by providing sources as well as phone numbers for agents involved in comparable sales.

Appraisals used to come in magically close to the offer price. They are great for reinforcing the price of a home. But these days, appraisals are often deal-killers, and often, they don’t show up on time. It’s also common to have an appraisal review as well, which slows the transaction down.

Make sure the lender has a qualified appraiser and, when possible, accompany the appraiser on the inspection. Explain to clients that if the appraisal comes in low, they might need to renegotiate the purchase price or pay a higher down payment.

Deal-killing attorneys

Buyers and Sellers sometimes don’t put much thought into who does their closing, often hiring a family friend or relative. It’s also common these days for price-conscious Buyers to seek out attorneys with low fees.

Closings can be incredibly complicated, and the wrong lawyer can spell doom for the sale. Make sure you choose someone who does closings on a daily basis so you don’t miss anything during the process.

Attorneys need to be able to spot potential problems, but not get so overzealous in representing their clients’ interests that they harp on insignificant details, or try to re-negotiate the deal.

Brokers should always be ready to recommend a good local attorney to clients.

Buyers with Cold Feet

Buyers today are much more likely to get cold feet than in the past, even after a bidding war or accepted offer.

Thanks to relatively low interest rates, Buyers are confident enough to re-enter the market and even make aggressive offers. But they still get nervous about job losses and the economy when it’s time to sign on the dotted line.

The best ways to assuage these fears, is to crunch the numbers, using recent comparable sales figures to make Buyers confident that they’re getting a good deal.

Mortgage problems

Even if a Buyer is well-qualified and is purchasing in a financially sound building, there are plenty of ways that a mortgage — or lack thereof — can derail a deal in today’s market.

For starters, a Buyer needs a commitment letter from the bank officially stating the amount and terms of the mortgage.

In the past, that letter was as good as money in the bank. But these days, commitment letters often arrive with conditions the Buyer must meet, or the deal’s off. Sometimes the requirements are slight, such as a signed copy of a tax return.

But at other times, the conditions can be more difficult to meet. For example, if the Buyer is selling an apartment, the bank might require the sale to close before the new mortgage can go through.

If both the Buyer and Seller want the deal to proceed, they can usually find a solution, such as allowing more time for the Buyer to find another bank. If not, they can end up in court.

Today’s lending climate can even ruin deals where the Buyer plans to use all cash. Some Buyers — even all those not planning to get a mortgage — are using now-ubiquitous mortgage contingencies as a sort of escape hatch.

Sellers often have little choice these days but to allow mortgage contingencies. But, lawyers said, they can protect themselves somewhat by wording contingencies very specifically so Buyers can only back out under a limited set of parameters.

Greedy Buyers

Today’s Buyers are fanatical about getting a good deal. In response, many Sellers have finally cut their prices to levels appropriate for the market.

But in their haste to get the steepest possible discount, Buyers sometimes push these Sellers over the edge by making additional demands after the initial meeting of the minds.

Zoning

In the current climate, zoning problems that might otherwise have gone unnoticed are becoming insurmountable obstacles.

A title search can reveal if a property can legally be used as a residence, or not. It’s recommended that Buyers check the zoning on a building’s certificate of occupancy before signing a contract.

Fluctuating stock market

The worst of the financial crisis may appear to be over, but memories of wild gyrations in the stock market — and the painful monetary losses that went along with them — are never far from buyers’ minds. Faltering European economies don’t help.

Brokers say they dread stock market fluctuations because they cause even the most eager Buyer to panic and pull out of the deal. The problem is most acute with Buyers in the finance industry, who are most attuned to these shifts.

A broker can’t do anything about the stock market, but they can spend time making sure their client feels very comfortable with the purchase before these fluctuations occur.

Bank delays

One of the biggest killer of deals these days is time itself. Many deals are falling through not because a Buyer isn’t qualified for a mortgage, but because it takes the bank too long to approve it.

The process of getting a mortgage now takes much longer than it did in the past, with banks requesting reams of additional information.

During the boom, a delay likely wouldn’t have killed the deal. But since most Buyers now have mortgage contingencies in place, they can pull out of the deal if they don’t get their financing within a specific amount of time.

The Seller’s attorney can avoid this problem by giving the Buyer more time to secure a mortgage.

When the property doesn’t measure up

A well-qualified Buyer can lose out on, for example, a condo property because the bank is concerned about issuing a mortgage. Buyers should contact the major banks to find out if the building is on their approval list. If not, the broker can request that the bank start the process of approving it.

Approval may still not be possible — the building may have too many sponsor-owned units, for example, or too small a reserve fund. But if the broker finds out about these problems ahead of time, he or she can find solutions — like warning prospective Buyers that they’ll need to put down 40 percent — before a contract is signed.

What Conveys

Sales can falter because of disagreements — like who keeps the fireplace screen, the wall sconces or the appliances. For some Buyers and Sellers, it can be difficult to distinguish between a Seller’s personal property and what actually comes with the house.

To bypass the issue, educate your client about the difference between attached appliances, fixtures and personal property. 

If something is really special to a Seller, suggest that they remove or replace the item before you put the house on the market. If this isn’t possible, exclude it in MLS (along with items like flat-screen TVs, which are frequently confused for a standard fixture) in the written offer.  Buyers should figure out what stays and goes as well, and include any items that are important to them.

Divorce

Many Sellers dread working with their ex, and their potential impact on a home sale is one reason why. Unfortunately, it’s pretty common to find out late in the process that a former spouse hasn’t agreed to the sale with their ex.

Make sure you get a preliminary title report as soon as possible and ask your Seller if there are any potential claims on the title.

Buyers buy stuff

Your first-time Buyers are moving into their new home. They don’t have a washer and dryer, and the local appliance store is offering a deal. 

Buyers should not make major purchases, like a new car or appliances, before escrow closes. Major purchases that affect their credit can also impact the mortgage.

Remind Buyers to wait to purchase appliances, furniture or a new car until their loan has been funded. Have them stash those credit cards until the paperwork is finalized.

Failure to disclose

It can be tough to get Sellers to reveal issues with their home, but it’s almost always better to overshare when it comes to the disclosure. Inevitably, a neighbor will tell the prospective Buyer about the unstable hill, or the moldy basement.

Don’t be afraid to ask Sellers the hard questions. And with Buyers, make sure you disclose everything. Problems always seem much bigger when a Buyer uncovers them after they’re under contract.

Unclear property boundaries

Your Buyer thinks they are getting a 6,000-square-foot lot only to find out that the fence is built on the neighboring property. Or they think they own the driveway, but it’s really an easement owned by the neighbor. Lot lines, shared driveways and fences are common stumbling blocks in a home sale.

Review the preliminary title report with your client, and have a title officer explain anything unusual. You and your client should also go to city and county courts to review the items on file. If your client is concerned about lot boundaries, recommend that they have the property surveyed by a professional surveyor. 

While surveys can be costly, not knowing the actual lot boundaries can be expensive. Also, keep in mind that if a client is concerned about only one side of the property, they can get a partial survey.

There are no permits

In many areas, unpermitted additions or remodels have become serious challenges for Buyers and Sellers. If your sale requires inspections, get them in advance, correct any pressing issues and get your documentation together.

Surprising inspection results

Inspections can kill a deal, but they can also save your client from a costly lawsuit. When your client invests in a home, they should understand what they are buying. 

Inspection periods are like a second negotiation phase, and this additional time can become a  problem when Buyers and Sellers can’t reach an agreement over who is responsible for what repairs.

Recommend that Sellers have their home inspected before the property is actively on the market. Buyers will probably get their own inspections, but a pre-inspection enables Sellers to resolve problems that might turn off a Buyer. Repairs almost always cost a Seller less if the Buyer knows about them before writing an offer.

The lender changes the rules

It can be hard to imagine, but sometimes, just when everything looks great — you’ve got your Buyer, not just pre-qualified, but pre-approved, and you are under contract — the lender suddenly changes the rules and your Buyer can no longer meet the lender requirements.

Unfortunately, this scenario can’t be always prevented. 

Work with a reputable mortgage broker or lender with a solid record of closing transactions. If you represent the Buyer, you may want to recommend that they leave their loan contingency in place until the loan is funded. Make sure your Buyer is aware of the ramifications if the loan doesn’t fund.

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Charles McDonaldBy Charles McDonald - Charles, and his firm, Charlottesville Solutions, are known locally and around the world for helping people relocate to the Charlottesville area. His background (running his own engineering firm for 20+ years in the Silicon Valley) has given him the skills to not only develop this site but also to manage a stellar group of agents!
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