When Real Estate Deals Fall Through

You've heard it a million times before..."real estate is your most important investment". Whether it is an investment or liability is always an argument, but nonetheless, it will be the most expensive investment you will make.

So why is it that so many real estate deals fall apart? Let's dive in below.

But first, I just want to introduce myself. I'm Aly, I work with RE/MAX in Calgary. I've been in the business for the past 6 years and help predominately first-time home buyers and sellers with their real estate purchases.

Now let's get into it.

When you are in the process of buying a home, most of you will know that there is a due diligence period for buyers to be able to waive certain conditions of the purchase agreement. The most common ones for these are financing, inspections, and document reviews (for condominiums). However, there are some issues that can arise from the seller's side of the sale that we will also touch on. Let's break down each of these and how they derail your next real estate transaction and how you can protect yourself from these issues.

Financing - Buyer Side

When you are searching for a home, ideally you have taken the steps to get a pre-approval completed for your next home. This pre-approval is only a general approval.

Not having this is mistake number one. Because this approval gives you not only a locked-in rate but also a dollar amount you know you can work with. You can check out my post entitled, "Credit Scores, Pre-approvals, Lenders....Where Do I Start?" to learn more about this process.

Without this step, you could be overleveraging yourself. As an agent, I strongly encourage my buyers to ensure this step is taken to give us a clear budget to work with and stay within.

Without this, you will derail your deal because when you take the purchase agreement to the bank for their final approvals, they will decline the lending if you are over-extended.

Financing - Seller Side

Now here is the one side of the finances you might not know about. I wrote an article entitled, Everyone Hates The Sticker Price! where I discussed how no one enjoys the asking price but why paying more makes more sense than higher interest.

But to build on this idea, everyone wants a deal whichever way they can get it. Real estate is no different. Where the issue remains is in how much the seller can sell the home for.

When the equity in the home is lower than that of the sale price, we call this a "short sale".

This can derail your deal because the seller does not have enough equity to pay the closing costs for the sale, which can include (agents, lawyers, mortgages, fees, etc). If this happens, they need to be able to cover the costs some way outside of the sale.

How do you remedy this? Your agent needs to ensure there is equity in the home before listing it. I do this for all my listings to ensure there is enough in the home to allow the seller to close comfortably.

This was a major issue while our market was low prior to the pandemic.

Fiancing is the biggest item that will derail a deal, but there is one other major component that will lead to a deal dead in the water.

Inspections and Property Condition

Inspections are the one component that is sometimes abused or completely missed when dealing with a real estate transaction. Some buyers like to try and use the inspection as an opportunity for the second round of negotiations whereas in some areas, just to get their offer accepted, they have had to remove this condition.

Inspections are built to find major structural issues in the home that require repair. These would include, roof issues, HVAC issues, plumbing issues, and so on.

But the part that is missed by some is that these inspections also shed light on issues like defects in the property from when it was built. These can normally be issues the buyer can overlook, but the banks will not. Some mortgage insurance banks will not insure certain types of homes that have issues. A good example of this is post-tension cables (email me at aly@calgaryareahomes.ca if you want to learn more about these). There are insurance companies that will not insure a mortgage that has this type of foundation structure.

Another item that could derail your sale is finding out that there have been some misrepresentations in the home, like a wood foundation rather than concrete. Or that the home was a former grow-op. All of these items may be okay with the buyer but the insurance companies for the banks will not approve them, therefore the banks not being able to fund the mortgage causing either more cash down for the purchase to remove the insurer to flat out deny the mortgage.

Another item that could derail or delay the sale is the production of a Real Property Report.

Real Property Reports

These reports, if you haven't heard of one, it is a bird's eye view of your home. Normally when you purchase a home from a builder or resale (excluding conventional condominiums) you are provided a real property report of the home that is compliant with the city's stamp.

However, if you modify the grounds that are represented in this report, you need to get it updated, which can be costly. A regular update can cost around $400 whereas a flat-out new report can cost $600 to produce.

But that is just the start.

You also need to make sure the items added (like a deck or fence) are not encroaching on a neighboring property. If the compliance review is completed and an issue arises, you could be on the hook to the cost of removing the item. In addition to that, you cannot produce a compliant RPR for the sale, which would make it a breach of contract and lead to other issues and funds being withheld.

These are some of the biggest items I've seen in my 6 years working in real estate. There are other smaller issues but for the most part, these are the ones that will cause a deal to fall apart or have major repercussions for the party with the issue.

If you appreciate these types of posts, please feel free to leave a comment below to let me know. I'd really appreciate it.

Thanks for taking the time. If you'd like to get in touch about your property purchase or sale, please email me at aly@calgaryareahomes.ca


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