After an offer is accepted and a real estate deal enters escrow, there are plenty of opportunities for the deal to fall through. Take some time to familiarize yourself with the 5 common reasons real estate deals fall through, and how to avoid them, to aim for the most efficient real estate investing process possible.
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1. Home inspection
Most real estate transactions will involve a home inspection, where a licensed home inspector will review the condition of the property and give a report to the buyers. In most cases, there will be a home inspection contingency in the offer that allows the buyer to back out of the deal if something is discovered during the home inspection that they do not want to take on.
How to avoid this problem as the buyer
Green Bay Realtor® Greg Dallaire offers this advice: “In some cases, the best way to respond to a home inspection report that reveals a major problem is to let the deal fall through. Major repairs that will cost more (in time or in stress) than you want to take on simply may not be worth it.
If you are really set on making the deal work, though, there are plenty of ways you can negotiate to keep the deal going without taking on too much liability. Consider asking the seller to repair the issue before closing, offer a credit towards fixing the issue, or lower the price to compensate for the problem.”
How to avoid this problem as the seller
Before listing your property, consider hiring a home inspector yourself to make sure you are fully aware of the condition of the property. If a problem is discovered during this process, you can choose to repair it before listing or disclose it to potential buyers and price the property accordingly to avoid any surprises.
2. Appraisal
If the property is appraised for less than the accepted offer, most mortgage companies will not allow the buyers to move forward without lowering the price. In some cases, a buyer may be willing to pay more than the appraised value, either by buying with cash or putting more money down to meet the lender’s requirements. In other cases, this is going to be a deal breaker for the transaction.
How to avoid this problem as the buyer
When an appraisal report comes back showing the property you intend to purchase is worth less than you offered, you may want to back out of the deal. If you do not, consider negotiating with the seller for a lower price that reflects the appraised value.
How to avoid this problem as the seller
Pricing your property well is part art, part science. The best way to price your home for a successful transaction that will not become an issue after appraisal is to work with an experienced agent who understands your local market.
3. Title issues
During the escrow process, issues with the title may be discovered. This might include a lien on the property, an easement, or a variety of other problems.
How to avoid this problem as the buyer
There is not much you can do to avoid this problem as the buyer. If a lien is discovered, keep in mind that it must be paid off by the seller before closing or it will become your responsibility.
How to avoid this problem as the seller
As much as is possible, anticipate these issues before listing and deal with any liens on the property beforehand. If paying off the debt before listing is not an option, understand that you will need to disclose it and be ready to provide credits or some kind of concession to cover it.
4. Cold feet
One of the reasons real estate deals fall through is simply cold feet. A buyer may have a change of heart or decide this isn’t the right move for them.
How to avoid this problem as the buyer
Prepare to make a confident decision by making a thorough list of what you are looking for in a property and how much you are willing to invest. In some cases, you may need to back out of a deal, and that’s okay.
How to avoid this problem as the seller
There is not much you can do to avoid this issue, but being honest and upfront with all information about the property is a great way to do your part in providing the buyer with all the information they need to make a confident decision.
5. Financing problems
Most people investing in real estate will be financing the purchase in some way. Issues with financing are one of the most common reasons a real estate deal will fall through. The buyer may have a change in DTI, credit score, income, or employment during the process, or be unable to verify something that the lender is depending on for mortgage approval.
How to avoid this problem as the buyer
After getting pre-approved for the mortgage, avoiding making any financial decisions that will impact your approval status. This includes taking on new debt, switching jobs, making large purchases, or depositing large sums of cash. If you absolutely need to do one of these things, make sure to ask your lender about them beforehand to avoid any unnecessary delays.
How to avoid this problem as the seller
While you cannot control your buyer’s finances, you can be careful about the offer you accept. If you receive multiple offers, pay attention to the financial strength of the buyer, not just the bottom line. In some cases, accepting an offer for a higher purchase price will not be the best choice if the buyer associated with it does not have as strong of funding.
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