There are basically two reasons why a property will fall out of escrow:
- Buyers financing does not come through.
- Negotiations, after the home inspection, fall apart.
For today, let's focus on the one that is by far the most common reason a real estate transaction does not close. Negotiations, after the buyers’ home inspection.
Here is the most common scenario:
Buyer and seller agree to a purchase price and an escrow is opened. During the next 17 days or so, the buyer/s complete all their due diligence in order to satisfy themselves that the property is in an acceptable condition. The main focus of this due diligence is a general home inspection usually carried outby a licensed and bonded professional.
Once the inspection is completed, the prospective buyers receive a written report on the condition of the home, along with a list of elements in the home that are considered "fine" and those "that need some attention."
This is point where things can go off track. If the report throws up some fairly costly issues the buyers were not expecting, this can cause them to reevaluate a couple of things.
- Do they still want to buy the home (regardless of price) now they know its true condition?
- Do they still want to buy the home at a lower price based on its condition?
Most of the time, option number 2 is the one in play. This manifests itself in the buyer making a revised offer to the seller. Opposing forces are now fully operational. The seller/s, were expecting to sell their house at the price and terms originally agreed to. The buyer/s now have a lower price in mind, due to the work they will have to carry out that was "unexpected."
I have seen many situations where during this critical phase buyers and sellers cannot come together and the deal falls apart.
This is a potential disaster for sellers who now have to go back on the market and look for another buyer, having lost almost three weeks of marketing time and with the added disclosure to all new prospects of the conditions that caused the first negotiation to collapse. As you can see, this scenario could cost the seller significant "loss of equity."
This is all avoidable.
A home inspection on a 1500 square foot home in Culver City is going to cost the seller around $400. The smart seller will wisely invest this money upfront before the home is even listed, so that the proper list price can be determined accounting for the realistic condition of the property.
This information can be provided to all prospective purchasers before any negotiations take place. In the end, the seller will save a lot of time, money and stress because no one is conceding ground that really wasn't theirs to concede in the first place.
Mike King is an Associate Partner at Partners Trust Real Estate and Acquisitions and a father of two kids in Culver schools. He is passionate about three things: family, real estate and McVities Chocolate Biscuits (or cookies to the uninitiated). You can connect with Mike on Twitter @mikeking4re and on Facebook.