Buying and selling real estate is a very touchy process. There are often high emotions. The people involved are often on edge because typically this is the largest purchase or sale of their entire lives. And just because they got their offer accepted, it doesn’t mean that they’re guaranteed to closing the deal.
In fact, deals often fall out of escrow all of the time!
In a hot market like the Bay Area, buyers often put in very aggressive offers and often make them non-contingent. So if the deal falls out, the buyers will lose their earnest money deposit. This EMD can often be upwards of $40,000.
Sellers also lose out because they already took their property off the market. They may have already started to count the dollars in their bank account. Now they have to go back and put their property back on the market. Only this time, other buyers will wonder why it fell out of escrow; they might think there’s something wrong with it.
We’re going to talk about the different ways that deals can be killed and what we can do to avoid it.
The appraisal comes in too low
When a buyer gets a loan, the lending company will hire a third party appraisal company. They do that to verify the value of the property. The appraiser will go inside the house, take photos, and make notes of any improvements or deficiencies with the home. He will then compare it with neighboring homes.
It’s important to note that appraisers will value the property based on recently sold comparables; but not with homes that are currently on the market. Are you a buyer in a super hot market and are offering above the asking price? There’s a chance that the home won’t appraise to your purchase price and will come in too low.
When that happens, the banks will usually ask you to put in more money to cover the difference. For example, if the maximum loan to value amount that the bank would lend you was for 80%; and you put in an offer for $1 million, you would expect to put down $200,000 for the down payment. But if the appraisal comes in too low, then they’ll reduce the loan amount to 80% of the appraised value. So in this case, let’s say it appraised for only $900K. 80% of $900K is $720K, so the bank would only give you a loan for $720K. This means you’ll need to come up with $280K for the down payment.
This might not be a problem if you have a lot of money, or have access to gift funds from your relatives. But if you don’t have enough in savings to pay for the increased amount for the down payment, then your deal could get killed!
Usually, when this happens, it’s very rare to get the appraiser to change their mind. Banks are also not the best when it comes to helping you fight or appeal the appraisal if it comes in too low.
When it happens, it’s best to call another lender ASAP to try to get another loan started and another appraisal on the house done. In fact, some buyers are so paranoid that the property won’t appraise. They even start the lending process with two lenders at the same time in the hopes that one of them comes in at their value!
If this is a fix and flip property, you could also get a hard money loan to quickly close on the property before refinancing it into a lower-rate loan. Hard money lenders often have appraisals as well but are more flexible when it comes to adjusting the appraised value in your favor if they see the potential of the deal.
In either case, the key is moving quickly and starting the loan process again.
More repairs than expected
Most contracts are written with a 10-15 day inspection contingency. During that time, the buyers can bring in their own inspector to walk through the property to verify the condition of the home. But if the home needs a lot more work than was initially assumed or advertised, the buyer is allowed to walk away and get their EMD back.
If you’re a buyer that’s in the contract for a property that needs a lot more work than you expected, you can do a few things.
You can ask the seller to make the repairs before closing.
This is the easiest solution because then you don’t have to worry about paying and managing the work. But some sellers won’t have the funds to do it.
Ask the seller to reduce the price to compensate for the extra work.
This works, but isn’t the best, because even though you got a reduction in price, you’ll still have to come out of pocket for the expenses. As an example, let’s say your property needs $50,000 worth of work. If you get the $50K reduction, you really only keep $10K in your pocket, since you’re getting a loan for the other $40K.
Instead, you can ask for the seller’s credit at closing to pay for rehab costs. There’s no difference for the seller whether they reduce the price or give you credit at closing. But by giving you credit, you get the full $50K at closing to use to pay for your rehab.
So if there are more repairs than expected, feel free to go back to the sellers to ask for a concession. But keep in mind that this is known in the real estate investing community as retrading. Agents hate working with
re-traders because as you can expect, it creates a lot of unnecessary emotional strain for both parties because you’re essentially renegotiating your deal.
Agents love smooth transactions and hate working with people that retrade all the time. Don’t get that reputation and only use it when the deal really won’t make sense unless you get the concession. It’s much better to put in a solid offer right from the start. You can do that by doing as much research and due diligence upfront.
Uncooperative buyer/seller
Finally, another way that deals can get killed is if the buyer or seller becomes uncooperative during the escrow process. During the escrow process, there are often small issues that come about that require the use of addendums to change the terms of the contract. Changing a name, close of escrow date, or any other terms will require the use of an addendum. And if they don’t sign the addendum, then it could hold up the closing of the property.
So make nice with each other and try to be as civil and accommodating as possible.
Sometimes investors buy properties with hostile tenants or squatters inside, making it impossible to get an appraiser to get inside of the property. When that happens, the lender won’t be able to give you a loan, and if you purchased the property without a loan contingency, then you may at risk of losing your earnest money deposit.
One of the ways that non-conventional lenders get over these issues is to offer you lower LTV when you close on the property. Afterward, they reimburse you at a higher LTV when you finally have access to the property. As an example, say you’re buying a million-dollar home and getting an 80% LTV loan on it. If they can’t go inside to do an appraisal, they might offer you 65% on day one. Then they reimburse the other 15% afterward. Of course, if you don’t have enough cash on hand for the extra down payment, this may not be an option for you either. Open communication is really important.
Conclusion
In this industry, everything is negotiable. There’s rarely a situation when a deal can’t be made if both parties are able to agree to certain terms about how the deal will take place. It just takes some creativity by both parties and their brokers.
So these are the three ways that deals get killed. The appraisal comes in too low, more repairs than expected, or having an uncooperative buyer and seller. Let me know if I missed a major deal killer. Leave a comment below with what you think is a reason why some deals don’t go through.
