When should you back out of buying a house?
In the eyes of Realtor Deborah Baisden’s client, a 65-year-old retired banker, the renovated waterfront home in Virginia Beach, Virginia, for just under $700,000 checked all the boxes.
But Baisden, a veteran real estate pro whose job is to evaluate properties with logic, not longing, saw issues with the house.
So, after negotiating a deal about a month ago with the seller, who also happened to be a flipper, Baisden did some detective work. While reviewing old photos of the property, she noticed that part of the 200-foot bulkhead was eroded. The damaged area, now replaced with pressure-treated wood, looked new, she said.
But a red flag went up.
“I like to dig deep,” Baisden said. So, as part of the home inspection process, she brought in yet another set of eyes. “My inspector went into the water at dead low tide,” she recalled. He delivered bad news. The prior fix was a band-aid. The bulkhead was rotting out below the waterline. “It has to be completely redone,” the inspector told her. The cost: an estimated $110,000, which her client would have to pay.
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When the pricey cost of the fix was added to the purchase price, the deal didn’t make sense anymore.
Baisden advised her client to walk away from the deal. The client agreed.
“I had to delicately take away her dream,” Baisden said. “Sometimes, no deal is better than a bad deal.”
In the emotion-fueled world of home buying, there are times it makes financial sense to let a real estate deal fall through
Not all deals get done. One of every 16 (6%) of real estate deals don’t close, research from the National Association of Realtors (NAR) found. Inspections and lack of financing were the “primary culprits.” Many deals went south because appraisals came in too low, causing either the bank or buyer to balk.
“There’s always an out when there’s a legitimate reason,” said Jay Rinehart, Jr., owner of Rinehart Realty in Rock Hill, South Carolina.
A few weeks back, Rinehart advised a client to back out of a $600,000 purchase after an inspection showed a newer roof was not installed properly. While the roof wasn’t leaking, the buyer’s legal team said the improper installation voided the roof’s warranty.
Said Rinehart: “We advised them that the roof was only four years old, but the problem is you have to live with it for another 26 years. If it does leak, it’s on you.” His client walked.
Often, the reason a buyer walks away is due to circumstances beyond their control, such as having a bank withdraw funding due to a job loss, furlough, or divorce that interrupts an income stream to make mortgage payments.
“Recently, one of my buyers called to say his wife has just been furloughed and we need to stop our search for a home until she is reemployed,” Baisden said.
Another deal killer is an agreement to buy a new house that’s contingent on selling an existing home, which doesn’t happen. The bank might also dig up information that puts the buyer’s debt-to-income ratio in a less flattering light.
“There’s always the possibility of something unforeseen once a lender starts to dig in and verify,” said Baisden.
But, more often, buyers walk away because they are being prudent.
Common deal breakers include:
Inspection Issues
Often, it’s detective work during the due diligence period that either makes or breaks a deal, Rinehart says.
One common reason to rip up a real estate contract is if the home inspection uncovers bad things, such as a crumbling foundation, mold and water-related issues, or shoddy workmanship. Or if the seller won’t agree to pay for pricey repairs of needed fixes.
“The buyer has to decide if the condition of the house is something they are willing to accept,” says Rinehart. If not, they can ask the seller to pay for repairs or lower the price. If the seller refuses, the buyer must decide if the added cost makes sense. “The buyer,” said Rinehart, “should not feel that they are completely locked in.”
Sometimes, repairs might exceed what buyers are willing to accept or afford.
“The air conditioning and heating unit might be 20 years old and at the end of its lifespan,” Rinehart said. “And they might not have $8,000 to replace it. If that’s the case, it might be in their best interest to step back and move on to another property.”
Low appraisals
Buyers borrowing money from a bank to buy a home often see deals killed by appraisals that come in much lower than the purchase price.
For example, let’s say the agreed-upon sales price is $500,000, which means a loan of $400,000 with a 20% down payment of $100,000. If the appraisal comes in at $475,000, the bank will only lend the buyer $380,000, or $20,000 less. If the seller doesn’t agree to sell the home at the lower appraised price, or the parties can’t meet halfway, or the buyer can’t come up with a bigger down payment, the deal will die.
“The amount that a home under appraises often will determine whether a deal with fall through or not,” Kyle Hiscock of Re/Max Realty Group in Pittsford, New York, explained in a blog post. “If it’s only a couple thousand dollars, normally a buyer and seller can come to terms. If a home under appraises by $10,000, the chances that the deal falls through will go up exponentially.”
Of the deals that fell through in the NAR survey, 16% were due to appraisal issues.
Rinehart ran into an appraisal problem recently. Despite an agreed-upon sales price of $620,000, the appraisal came in $80,000 lower. The buyer wanted the house for $540,000. The seller said no. It turns out the appraisal had some glaring errors. The deal is still pending after the buyer went to a new bank to get financing and a new appraisal. “I don’t know the end of the story,” Rinehart said. He’s hoping the new appraisal will be on target so the deal can get done.
Paperwork snafus
Buyers should consider walking away from a deal if document preparation for closing highlights potential problems. Some deal breakers include title issues that put into question the true owner of the property. Or outstanding liens, or money the seller still owes on the property. Or missing heirs who might own a piece of the property the homebuyer wants to purchase.
Rinehart walked away from a deal due to title-related issues involving children that had ownership in a home through an estate, but couldn’t be located.
There can’t be a deal “if the seller can’t deliver title,” Rinehart said.
