They're Not Buying Our Home? Why?
Telling a seller that the buyers changed their mind is something Realtors hate. Luckily, it doesn't happen often. When it does it's usually within the first couple of weeks of the contract but not always.
It's important for sellers to understand that cancellations can and do happen. It's easy for buyers to have a change of heart. They may find another home they like better. Maybe they wake up with a bad case of buyer's remorse after signing the contract. Or maybe they decide they can't afford it.
In recent years, buyers were bad to cancel their contracts on short sales. They would make an offer. Then months would drag by while everyone waited for bank approval. Buyers grew impatient. Sometimes they continued looking at other homes and found a home they liked better.
Buyers can and do cancel their offers on traditional sales. The standard agreement requires buyers to make an "Earnest Money Deposit". This deposit is the seller's best insurance that the buyer is serious. The buyer usually states that they will make the Earnest Money Deposit within a couple of business days. If the buyer fails to make the Earnest Money Deposit within the agreed upon time frame, the buyer is breeching the agreement.
Stalling or not making the Earnest Money Deposit is a tactic we see when buyers are making multiple offers. In a market with low inventory, buyers may find two or three homes that suit their needs. They'll make offers on each one to see who will meet their price. When they've heard back from all the offers, they'll pick their favorite. This is frustrating for sellers but it's better that a buyer cancel before escrow is opened than waste weeks of a seller's time.
Once the Earnest Money is in the escrow account, the buyer is only entitled to a refund if they cancel due to contingencies in their offer. As Bankrate reported, there are eight contingencies that often allow buyers an out. As a seller, it's important that you and your agent are aware of the contingencies in any offer.
A top listing agent will not only be aware of the contingencies, they will track whether the buyer is doing them on schedule. Most contracts provide buyers a 10 day "due diligence" period. During the due diligence, the buyer gets access to the home for inspections and certifications. The seller must provide the Seller's Real Property Disclosures during this time.
About that Inspection
Inspection issues can terminate the agreement. If the inspector finds problems, the buyer and seller may agree on repairs. In lieu of repairs, the seller may contribute funds to cover the cost of repairs. When the buyer and seller can't agree on the repairs, they can cancel the deal. This is a good reason for sellers to consider having their home inspected before listing it for sale.
This is an added expense that many home sellers prefer to avoid, especially if the home is newer and well maintained. We've seen situations where an inspection uncovered something the seller's were completely unaware of.
In one situation, the sellers were moving out of Las Vegas due to the wife's health issues. When our buyers had the home inspected, they found a serious mold issue with the HVAC system. The sellers had to have mold remediation and a new HVAC system. The ducts for the eleven thousand square foot home had to be professionally cleaned. Our buyers didn't walk away when they heard the "M" word. Some buyers do. Who knows if the mold contributed to the seller's health issues?
Sellers who choose to skip hiring their own inspector should take a look at the home themselves. You can prepare for the home inspection by changing the AC filters, any dead batteries in smoke detectors, etc. Those are minor, but two of the most common items our inspectors find.
Is the home is in a homeowner's association? Sellers must provide the buyers with a copy of the most recent Common Interest Community (HOA) documents. Your agent will typically order them and you will pay for them. You will want to order them once the earnest money is in escrow. The HOA may take up to 10 days to provide the documents. Once the buyer receives the documents, they have five days to review them. If they find anything objectionable they can cancel the agreement without risking their EMD.
Financing is another contingency that causes problems in today's market. Sellers should work with an agent who will double check the buyer's pre-approval letters. In some cases, they may ask the buyer to get approved with a lender they trust. The buyer is free to use the lender of their choice, but sellers have the option of verifying the buyer's ability to qualify.
A common mistake sellers make is to assume that buyers offering a low down payment are not as qualified as those offering a bigger down payment. Today's low interest rates encourage many buyers to finance as much as possible. The buyer using a VA or FHA loan may have stellar credit. Your Realtor should vet their approval letters, including calling their lender before you accept an offer with financing.
Part of the financing will be the appraisal contingency. Banks are stricter about the loans they make than when you bought your home a few years ago. Upgrades may not be valued as high as you would expect. If the appraisal comes in lower than the purchase price, the buyer may ask you to sell for the appraised value. If the buyer agrees your home is worth more than the appraised value, they may pay some or all the difference out of their own funds. If you can't work something out, they may cancel the agreement and receive a refund. One of the best ways to avoid appraisal issues is to price the home in line with the current market.
Contingent on Selling Their Current Home
Does the buyer need to sell their current home first? Going into contract with a buyer who has to sell their home first is risky business. Too many things can go haywire with the home they're selling. Before considering the offer, your agent should verify that their home is listed. They should check to see that it's "priced to sell". Have them question the buyer's agent about activity on the home. It would be best if the buyer's home was already in contract and their buyer's due diligence period had passed. Accepting an offer that's contingent on the sale of another home is a gamble to avoid if possible.
All Contingencies Removed
So what happens if you pass all contingency deadlines and the buyer still cancels? They may not be entitled to a refund of the EMD. In case of a dispute, most contracts call for mediation.
The Las Vegas Residential Purchase Agreement contains a "buyer default" clause. When making the offer, the buyer will choose one of two options. One reads "Seller may retain, as liquidated damages, the EMD". The second reads, "Seller shall have the right to recover from Buyer all of Seller's actual damages".
Most buyers will pick the first option rather than risk having a seller pursue an amount higher than the EMD. The EMD is likely to be the only compensation for a seller when a buyer cancels without cause.
Yes, You Can Still Get Your Home Sold
Now that the buyer has defaulted, how do we get my home sold? When a buyer cancels the deal it can create a stigma. Future buyers will want to know what went wrong. Were there inspection issues? Did the home appraise?
It's best to give honest answers to those questions. If the cause was a problem uncovered during the inspection, you need to make any necessary repairs. Save all receipts to show future buyers.
Appraisal issues can be more complicated. Your agent needs to show comps, a list of upgrades, etc., as evidence that the appraiser made a mistake. And, if the buyer just flaked out, your agent can disclose that.
You should put the home back on the market as soon as possible. You may want to revisit your list price before you do. Have your Realtor check to see if any homes have sold that will influence your appraisal. Are there new listings to compete with your home? If a price adjustment is warranted, better to do it sooner than later.
Do you have to move out before the Close of Escrow? Under most circumstances, yes. Buyers are entitled to do a final walk through before closing escrow on your home. You need to move out and allow enough time to clean, sweep and get rid of trash after moving out. The final walk through is the buyer's last chance to cancel for cause. It's important that sellers maintain their home while it's in escrow. If anything gets damaged or breaks after the inspection, get it fixed.
If the buyer agrees, you can ask to do a "leaseback" when negotiating their offer. Most buyers will need to be moved into the home by a certain date. That may prevent them from agreeing to a leaseback. If they can accomodate the leaseback they will expect you to leave some funds in escrow after closing. This will serve as a security deposit to cover any damages that might occur. They will still want to do a final walk through before closing. The final walk thru will provide a checklist when they inspect the home after you've moved. Any damages that occur during the leaseback will be withheld from the funds you've left in escrow.
Selling a home includes a lot of moving parts. That's why Realtors preach that you need to declutter, make repairs and price it right. You have the best chance of selling your home without issues if you take all the right steps. This includes hiring a top Realtor in your specific area.
Debbie Drummond is a Full Time Realtor with over ten years experience in the Las Vegas Real Estate Market. She and her team of Real Estate Pros offer the highest level of service. If you’re buying or selling a Las Vegas home, call (702)354-6900 or email Debbie@LVHomePro.com. They’ll be happy to assist you in your move.