The odds of your real estate transaction closing on time are surprisingly small. So what do you need to do about it?
This is one of the scariest secrets of the real estate industry. It is rarely talked about, and the secrecy that surrounds it is also one of the top reasons that real estate sales people have lost so much trust over the years. Problems will happen. It is those that are transparent about them, and deal with them that will stay in business and get referrals.
Last summer, the headlines said it all when describing “The New Normal: 25 Percent of Pending Sales Don’t Close.” A couple years before, this figure doubled. The National Association of Realtors revealed that another 20% of deals are delayed, but eventually close. That number could now be twice as high. In fact, most real estate pros might report that very, very few transactions ever close on time.
It is critical for all home buyers, sellers, real estate investors, agents, and CFOs to recognize this fact. Homebuyers and sellers can find their lives thrown into havoc if they have to stay in hotels in between closings. It gets even worse if they need the cash from a previous transaction to buy the next home, or if mortgage lenders demand that property is sold before they’ll find the new home loan. Those real estate professionals that don’t prepare their clients for this can find their reputations taking a hard hit too. Business owners need to factor this into cash flow or go broke. Investors need to prevent missed opportunities and capital sitting idle. All buyers need to recognize the threat to their earnest money deposits and potential for lawsuits.
So why are so many real estate closings delayed? How can this be prevented? How should you deal with it when it happens?
10 Reasons Real Estate Closings Get Delayed
- Appraisals
- Title insurance defects
- Parties do not have valid ID at closing
- Buyers funds aren’t available
- Mortgage companies not ready to close
- Credit scores or job statuses change
- Property inspection reports
- New damage to the property
- Declining property values
- Delays in obtaining HOA and condo approval
This is just a snapshot of some of the potential delays in real estate closings. There are many more. These can be compounded when there is a chain of real estate transactions reliant on each other.
How to Prevent Closing Delays
How can those involved prevent both closing delays and the potential consequences these delays bring?
The really big threat isn’t just the inconvenience and minor direct costs associated with a delayed closing. Accordingly, if it doesn’t happen on time, there is a good chance it won’t happen at all. This is especially true in a hot market when sellers and their agent ‘think’ they can quickly put the property back on the market and find a new buyer. Of course that isn’t always the case, and there are no guarantees the same issues won’t arise next time. However, some Realtors, attorneys, builders, and other sellers think they can bank more by keeping the buyer’s deposit and just moving onto a new contract.
The first and most important consideration is leaving more than enough time to close. If your mortgage company says they can close in 30 days, make your contract closing date 60 or 90 days out if you can. If you are paying cash, still allow extra time for the title and insurance companies to do their jobs.
Homebuyers may wish to protect themselves further by not making an earnest money deposit in advance. If you must, make sure that deposit is made with your attorney or title company, not with the seller or their agent.
Sellers can protect themselves by minimizing the time buyers have to conduct to complete inspections, by choosing cash buyers, and by accepting backup offers.
How to Deal When it Happens
Real estate professionals need to jump into the mix right away. As soon as there is a hint of a delay, they should be working to get extensions and preparing all parties. The instinct is usually to hide under their desks and avoid answering the phone, but those that choose fight instead of flight will find it pays off.
Normally a contract extension can be worked out. It may cost buyers more in daily charges, or releasing additional deposits, but if the odds of closing are good everyone should be better served by extending versus starting over from scratch.
Whatever side of the transaction you are on, remember how you would like to be treated if in the other person’s shoes. Remember they have families to feed, and that the industry is better off if people can act gracefully.
