Thursday, October 04, 2007

Why Do Contracts Fall Apart?

by Osman Parvez
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In my experience, there are many reasons a contract could fall apart. Having a good agent can help prevent it from happening.

But only 3 reasons?

1. You have a contract with an unqualified buyer – If you have a real estate agent, this would never happen, so I guess this should be categorized as a rookie mistake. Always, always make sure your buyer is qualified. Lots of times, sellers won’t even show a home to someone who is not qualified.

The silver lining of the cyclical downturn is that buyers (at least in Boulder) are now generally more qualified than in the past few years. Gone are fast money seekers bearing marginal credit with no down payment. In our market, buyers today are usually well qualified. The last dozen or so we've worked with have had exceptional credit, substantial down payments, and good incomes to match. Oh, I'm sure there are still some unqualified buyers in the market too. You should rely on your agent to review contract terms and buyer qualifications. Your agent can note red flags and help you determine if a buyer is unqualified.

2. Homebuyer receives negative information about your home – In other words, an inspection showed something that wasn’t disclosed or obvious to everyone on the face of looking at the house. Sometimes people even use the inspection as a loophole out of the contract due to buyer’s remorse.

Unless there is something substantively wrong with the property, I've found there are usually underlying reasons a buyer walks on inspection. Perhaps they've found another home they like better. Sometimes buyers simply get cold feet. After all, purchasing a home is a massive financial commitment and the inspection is a relatively easy way to terminate a contract. That's why we advise our sellers to put inspection deadlines as early as reasonable and to be prepared for issues that might come up. Once we know a buyer is qualified and have negotiated the deal to our client's satisfaction, the next major hurdle is guiding the contract through the inspection process.

3. You have a contract with a qualified buyer, but the closing date is too far away – If you know the adage, “Hurry up before they change their mind,” you’ll understand why you shouldn’t let a deal idle for too. People change their minds — it’s that simple. If you have a buyer, get things moving before something better comes along or they get cold feet. People back even at the risk of losing their earnest money.

Sometimes long closing dates are part of a buyers game-plan. While not ideal, there are some things that can be done to mitigate the risk of the contract falling apart. In particular, get as many deadlines squared away as early as possible and consider increasing the earnest money deposit to cover your mortgage payment loss if the contract falls apart. This can reduce, but obviously not eliminate, risk that the contract will fall apart during the long run-up to closing.

Here are a few other reasons contracts fall apart...

1. Life circumstances: Anything can happen. We've had clients have car accidents just before closing and end up in the hospital. Given their health issues and looking at substantial medical bills, they walked away from their earnest money deposit. Couples can break-up. Jobs and job offers can disappear.

2. Mortgage market fluctuations: As was the case last month, there can be sudden shocks to the system causing lenders to terminate lending commitments. If rates have moved up since the buyer locked, or if there is isn't enough time to set-up another loan, contracts can fall apart.

3. Appraisal Issues: In some markets, like parts of California at the moment, some appraisals are coming in below what buyers paid a year ago. For those looking to re-finance or have little equity in their home, this can be a big problem. They will have to bring money to closing.

4. Ill will and bad faith in negotiations: Sometimes negotiations over terms can become very unpleasant. I won't flinch from a tough negotiation, but if either party feels they are being taken advantage of or disrespected, it often comes up later in a myriad of ways. In particular, a previously created ill-will may appear during negotiations over inspection items. This is why it's best to have your agent present issues as reasonably as possible if only to avoid creating a "this is the last straw" mentality in the other party.

The list goes on....

For sellers, taking your home off the market entails substantial risk. Not only are potential buyers not seeing your property, but you may miss the peak selling season. This is why it's important to choose an agent who can help qualify buyers and negotiate skillfully. You want someone who is adept at finding solutions and ultimately knows how to get your deal over the finish line.



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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

3 comments:

  1. Hello, Osman: Thanks for adding to the list of 3 Reasons Why Contracts Fall Apart. I see now that the 3 reasons we listed were just the tip of the iceberg! Thanks for your insight and expertise -- this information is very helpful to consumers who have no idea what awaits them. As Yogi Berra says, "It ain't over until it's over."

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  2. If you have a real estate agent, this would never happen, so I guess this should categorized as a rookie mistake.

    "... should rarely happen..."

    Sometimes even qualified buyers as vetted by the best agents have things happen. Everything from unexpected job loss to identidy theft. It is unfair to expect perfection from the screening process even the best agents perform.

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  3. I agree Rob. You shouldn't expect perfect screening from your agent. Still, this is an often overlooked area of expertise that your agent can help provide.

    In many cases, knowing the agent on the other end of the transaction helps qualification. Interestingly, it's not uncommon on very high-end property to require actual some due diligence on a buyers qualifications prior to showings. These markets are often small but have exceptionally high transaction values. Think Aspen, Nantucket, Jackson Hole, etc.

    Even in Boulder, where most transactions are not multi-million dollar, reputation of a buyer's agent counts. If we've had positive, professional experiences in the past with a particular agent, we're more likely to trust the qualifications of his or her buyer next time around.

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