THE TOP REASONS REAL ESTATE DEALS FALL THROUGH
This blog attempts to summarize some of the reasons real estate deals don’t make it to closing. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney if you need an alternative closing.
Deals don’t often fall apart, and when they do it’s not always within the control of the Realtors involved. It’s more likely that a deal will be delayed due to things like lender issues or liens, and depending on how long it’s delayed that can cause the whole deal to fall apart. There are a few things, however, that the Realtor can do to make the experience better for their client and up their referral chances.
The top reasons we see deals fall apart:
- Lack of communication
- Poor expectation management
- Lack of communication
- Ordering too late (termite/repairs)
- Lack of communication
- Not realizing the needs of your clients
- Did we say lack of communication?
The biggest issue we see at our office is communication. Communication is the most important thing I can think of when it comes to making deals run smoothly, so we’ll be talking a lot about what things need to be communicated and when in order to keep everything on track.
We try to facilitate as much communication as possible with everyone involved in the transaction. Our Agent Liaison sends out weekly updates to the agents to let them know the status of the contract, what we’ve received vs. what’s still outstanding, and what we’re currently looking like for closing. Right in the beginning when we receive a contract we will also reach out to the agents and the buyers/sellers for some preliminary information – we try to get all of this as early as possible because there’s a lot that we do behind the scenes that other parties never really see. The first place where a lack of communication becomes an issue is when we don’t receive answers from these parties in a timely manner.
For the buyer, the biggest things we need to know are:
- if they’re attending closing in person
- who their lender is and how to contact them (It does happen on occasion where we’ve finished our title work but the lender hasn’t requested title from us and we don’t yet know who the lender is, so we can’t reach out ourselves)
For the sellers, we need to know:
- if they have an HOA and how to contact them
- if they have a mortgage on the property and what their loan information is so we can order a payoff
- their social security numbers to order those payoffs
- whether they are/were living at the property for tax purposes
Regarding the agents, we need to know:
- their commission so we can get them paid
- which termite company (if any) will be performing the inspection
- if there will be a home warranty as part of closing
- whether their clients have any special closing needs (ie. a mail away closing or Power of Attorney, if the property is part of a 1031 exchange, etc.).
Part of the reason that closings typically take about 30 days is that all parties, including our office, need that time in order to gather all necessary information and documents. We can’t move forward on a closing until we have all the information stated above, and if we don’t get those for one or two weeks (which DOES happen) then we’re two weeks behind on our timeline.
Some other things we need to know about up front in order to keep timelines are:
- Full names – When we order title, we have to do so with the full name of all buyers/sellers involved. If a name is incorrect or if a person is left off a contract initially but will actually be involved in the transaction, we have to then order a title update with the correct information, which can delay us anywhere from a few days up to two weeks depending on which county the property is in.
- Estates – It does come up where the seller is listed under their personal name, but it turns out they’re actually the representative of an estate that owns the property. Always let us know about this as soon as possible because all estates are different – depending on whether or not there is a will, we may have to go to probate court to get approval to sell, which can really delay closing. Providing us with the estate docs early on and allowing us to communicate directly with the estate attorney is very helpful because we’re then able to address potential issues early on.
- Deceased parties – If the seller is a widow and their deceased spouse owned the property with them, we will likely need a copy of the death certificate. This information will usually come back with our title search, but at that point we’re already 1-2 weeks into the process and if the seller needs to locate the certificate (We’ve seen a situation where the only copy was in a storage facility in another state) then that could delay us further. If we know up front to ask for this then it just gives everyone extra time to fulfill the request.
- Bankruptcy – If your client gives you any hint whatsoever that they’ve been involved in bankruptcy in the past, let us know so we can be prepared for that when we do our title search. This can affect how we speak to the client and negotiate judgements and liens that may be tied to the property. This information will also allow us to let them know some of the services available to them.
- Third party lender (private person) – We often see these deals listed as cash deals on the contract, and then later on we find out that the buyer is just getting a private loan from a private citizen. Deals like this require a note and mortgage, and we need to know whether they need us to draft these legal instruments for them, or if they’ll be doing it themselves.
- Trailers (personal property with DMV vs. fixture of real estate with tax assessor) – This will typically come back through our title work on the tax maps, but the earlier we know about it the more conversations we can have with the seller regarding how it’s being taxed. There are two main ways trailers can be taxed by the state or county: one is just like your car where you have a title and a tag and you renew it every year, and the other is that they take the wheels off, put it on blocks, attach the meter to the side of it, and they call it a “fixture,” which essentially allows for the trailer to be taxed, as if it were a house. The local tax assessor can be a little aggressive about requiring trailers to be removed from property, and so if there is a trailer that is a fixture we may have to speak to the tax assessor about ensuring it counts as a fixture when it comes time to sell. The way we handle the sale of that trailer changes drastically depending on whether it’s considered personal property through the DMV or part of the real estate.
Another thing I see upset closings even as late as the closing table are improper expectations being set. Some of the specific issues regarding expectation management we see most often are:
- We will be asking for personal information – When we get a contract we immediately send out an email to the sellers asking for very personal information such as mortgage loan numbers and social security numbers; this can be scary when this is the first interaction they get regarding the closing, so it’s important for their agent to let them know that email will be coming and that it’s normal for the attorney’s office to need that information for payoff purposes.
- CD numbers change – Something we see often comes back to the federal law that numbers need to be disclosed on a CD at least 3 days prior to closing; this means that a CD will go out at this time, but it won’t necessarily be the final CD and numbers. Usually this is just a high estimate CD that’s very close to what the final numbers will be, but isn’t 100% accurate. The final CD comes out between 3 days prior and the actual close date once we’ve been able to balance all the numbers with the lender. Unfortunately, sometimes the numbers aren’t completely balanced until the day of closing, which can cause confusion when the buyer or seller sees a proration change for taxes (if, for example, we ended up closing a day early). We also estimate the page count of a note and/or mortgage so that when we go to probate we know we will have enough money to record it, so once we get numbers from the lender and we know the page count for sure we can adjust the numbers and update the CD (this can happen before closing, but sometimes occurs as a refund check to the client at the closing table).
- Waiting for funding at closing – This one always confuses the buyer because they believe that at this point they’ve already been approved for their loan and funding should already be in place. In this case we do have all the docs, we’ve gone through underwriting and we have approval, and we have the ability to fund, but we need to wait for the lender to allow us to release those funds. They give us a lot of money to hold for closings, and this comes with rules as to when we can release it, such as certain forms the lender needs to see first. In this case we would have to get these forms at the closing table (for example, a final inspection form showing all work has been done), scan them to the lender, and then once the lenders has them they will allow us to fund the transaction.
- Seller-paid closing costs have limits – Just because the seller has agreed to pay up to $6,000 in closing costs doesn’t mean the buyer will get the full $6,000; if closing costs end up only being $4,500, the buyer will not get an additional check for the remaining $1,500 in their pocket. This comes down to mismanaged expectations because the buyer believes they have lost $1,500 when in reality they never had it.
- Buyer’s funds – The most common way buyers bring funds to closing is through a wire transfer or a certified check/cashier’s check. Though we can accept a certified check at closing, it’s preferable to receive them a day or two early because it can sometimes take 24 hours for the check to be deposited in our bank. If we receive the check early then we can wire out payoffs and cut closing checks on time without having to wait for the bank to clear the buyer’s funds. We CAN take a check at the closing table and still disburse on the same day, it just takes a few extra steps with the bank and, if your closing is later in the day, that can affect timeline. If they prefer to do a wire transfer, we need to know before closing so that we can send them our wiring instructions and go through our security process to prevent wire fraud. Then the client will have to take that to the bank to have the wire sent, so it’s best for us to be able to send them these instructions a few days before closing to give them time to prepare.
A note on wire fraud: Wire fraud is a very big issue right now in this country. We will never contact the client prior to closing and tell them we need funding immediately, and we always slow the process down to ensure the client is comfortable and can ask questions. If the buyer comes to the closing table without preparing for a wire or certified check then we will likely tell them they need to go to the bank right then, but that’s the only rushed case. If your client ever receives something saying they need to send funds immediately or they won’t be able to close, that is likely fraud. We never rush things when it comes to money and we always want the client to be able to take their time and ensure any request they receive is actually from our office.
WIRs / TERMITE LETTERS
For a lot of agents, their custom is to wait to order these until the very last week before closing. This is generally because they want to ensure the deal is going through before adding this inspection fee to their buyer’s list. This makes us very nervous for a number of reasons:
- Termite letters do not always come back clean even when you think they will, and if they don’t come back clean then another appointment has to be scheduled for the company to come back out and fix the issue. This fix may not happen the following day, which means closing will be held up until someone can repair the issue, write up the new docs (which usually takes 1-2 days), and send them over to us and the lender.
- Termite companies can’t always get out to inspect immediately once an inspection has been ordered. This has been a bigger issue over the last two years because Covid would wipe out entire offices and they wouldn’t be able to send anyone out until someone came back from quarantine or sick leave. Aside from Covid though, a termite inspection can’t be done when there has been a significant amount of rain either. So if you wait until a week before closing to order the inspection and then it rains for 3 days, you’re cutting it very close on when the property can be inspected and docs can be received.
Never be afraid to order a termite inspection 2-3 weeks in advance. We actually recommend calling the company as soon as you have a contract in place and ordering the inspection for 2-3 weeks out from closing. That should leave enough time to ensure the inspection will be done and still leave room for repair work if needed. A termite letter is usually accepted by a lender as long as it was done within 30 days of the closing date.
Don’t just tell the lender about these – we need to know too! Sometimes the client will think they need a special request when it isn’t actually necessary, and then we can speak to them about it and save them money. Let us know about any of these as soon as you hear about them:
- POA / Power of Attorney
- Mail Away
- Signing early – particularly for sellers
- Repairs / Escrows – even if the repairs haven’t been finished by closing, we typically need some type of invoice in order to add it to the Settlement Statement and submit it to the lender for approval
As we said at the beginning, the Realtors don’t always have control over a deal falling apart; sometimes the lender won’t be able to complete the loan anymore, or the seller will have liens that are too high to pay off. In situations like this, it’s best to be able to point your client in the right direction even if you’re not necessarily there with them during the process (for example, where to go to negotiate lien payoffs down). But with the other issues we’ve gone over today, always communicate as best you can with all parties involved and there is usually something that can save the day.
Can you help draft a note and mortgage for a private lender or does that have to be done through the buyer’s separate counsel?
We can go either way on this. We do help draft notes and mortgages all the time for our clients, but sometimes they are more comfortable having it done by another attorney. In this case, I’ll work with the other attorney to ensure I have what I need to close. Sometimes they’ll have another attorney who just reviews the documents my office writes, which is also fine with me. We then draft up the base documents that we typically use, send it over to the other office to review, and they’ll approve it and kick it back over to us to use for closing. We’re always happy to organize this process in a way that works best for your client.
What happens when the seller doesn’t know the name of their HOA or how to contact them?
If the seller knows they have an HOA but that’s all they know, then we have to go on an intensive Google hunt to track down that HOA and contact information. HOA contact info is supposed to be listed in the MLS on the listing for the property, but unfortunately it isn’t always accurate; we’ve had agents tell us there is no HOA in a neighborhood before but then the seller says there is. We do have a database that we’ve compiled over the years including contact information for all the HOAs we’ve come across so far, but there are still some we’ve never seen and don’t know how to contact. Sometimes we know the name of the HOA but when we search them they only have a landing page without any contact info, and that doesn’t really help us. If our search really comes up empty, we will go back to the seller and encourage them to dig for some paperwork from their closing that details the HOA contact point and hope they’re able to find something.
I recently had a buyer sign a contract on a new purchase and then two days later Russia invaded Ukraine. My client was worried he would lose his job because of the field he was in and no longer felt comfortable going through with the purchase, so we asked for a mutual release with his $5,000 earnest money to be returned; the seller refused to return it. Is this ethical/legal?
When a seller is trying to force a buyer to go through with a sale, they have to use a specific performance remedy. It’s very rarely used, though. Typically what it comes down to is which party is willing to bluff long enough that the contract gets sent to arbitration. In this case the earnest money would be transferred to the court to hold until the situation is resolved so that the brokerage originally holding the earnest isn’t stuck in the battle too. Typically I try to encourage buyers and sellers to agree on something outside of arbitration, even if it’s a split of the earnest, because arbitration can take years and is rarely worth the time/money. If the contract isn’t released, then the seller can’t technically relist and the buyer will have trouble trying to purchase something new if that contract has been entered into probate. There is a legal reality here, but there is also a practical reality, and sometimes just having a conversation with the parties can facilitate an agreement without the extra steps. The golden parachute in most contracts, though, says that if you no longer qualify for the loan then the contract is voided through no fault of the buyer. So in the specific case of this question, the buyer could go directly to the lender and say “I’m not sure if I’m going to have a job in two weeks; can you please just reject me now?” And the lender will usually appreciate the heads up.
By: Geoffrey K. Middleton
Attorney at Law
Written in March 2022