"Flips, Fall-outs and DFTs"
They are called “flips”, “fall-outs”, “DFTs” (deal fell through) and cancellations but no matter what you call them when a real estate deal goes sideways it’s not a pretty sight. An escrow cancellation can be emotionally and financially devastating to all parties. Buyers could end up in a dispute over their earnest money deposit, sellers who may have already physically or mentally moved on must put plans on hold and agents are resigned to watching their hard work disintegrate. The accusations, second-guessing and finger pointing can leave a train wreck of hard feelings and disappointments.
Between 2000 and 2006 fall-outs didn’t happen. The demand for housing and plethora of lenders willing to make loans to anyone who could “fog a mirror” insured that any obstacles incurred during the escrow process could be overcome. More recently, circumstances have changed and escrow cancellations are becoming all too common.
Preventing an escrow from falling-out is important in any market but especially in a weak buyer’s market. All standard real estate contracts are written “subject to” many contingencies. Sellers and their agents should have as many inspections and reports together early in the listing process to prevent a leading cause of cancellations…the surprise! Every property will have at least one Big Surprise and sellers should discover it early and take preventive action to insure that the buyers are not surprised right out of the escrow. Buyers are demanding clear reports from: pest/termite, well/septic, roof and whole house inspectors. Problem areas need to be corrected before escrow is opened. The goal is to eliminate all surprises.
Buyers will need to line up financing early. Despite pre-qualification and pre-approval letters, about one-third of all escrow cancellations have to do with a buyers inability to obtain financing. Buyers who thought they could qualify for a loan didn’t or they qualified and the lender could not fund the loan. Many large Internet lenders have shut down their web sites, filed for bankruptcy and are defaulting on commitments to borrowers. I am not a fan of large impersonal lenders who use non-licensed telemarketers to pressure borrowers into making bad financial decisions. Local mortgage brokers have more alternative sources of financing when times get tough. There is a reason (“What’s in your wallet?”) Capital One Financial is no longer originating residential loans while your local lender is.
Another reason for a DFT is simply the buyer changes their mind. Standard purchase contracts allow buyers 17 or more days to conduct any inspections or review any reports about the property. During that period of time, if the buyer discovers anything they didn’t expect (surprise) they could cancel the contract and demand a refund of their deposit. Eliminating all contingencies and surprises on time will help the transaction to proceed along on schedule. Experienced agents know the longer a transaction takes to close the greater the risks are that it won’t.
The most frequent reason for an escrow cancellation occurs when an escrow sale is opened based upon the sale of another property. In our current market, buyers should never open an escrow based upon the sale of their home but should sell first and then start looking for a new home. Renting for a few months is preferable to making double payments and having the uncertainly of not knowing if, when and for how much an existing home will bring.
In life stuff happens. The important thing is how we react to the stuff. I recently represented a buyer on a purchase who soon after his offer had been accepted, discovered he needed major surgery and was unable to proceed. The same month an experienced buyer’s agent called to tell me his clients could not qualify for a loan that he assured me was “no problem” earlier that week. I once lost a sale in El Dorado Hills when the buyer’s discovered Serpentine rock in the back yard. Another agent’s buyer was terminated from his employment 5 days prior to closing and unable to close his loan. Years ago I had a client die during the escrow period.
Statistically, in a balanced market, ten percent of all escrows will cancel prior to closing. In a seller’s market less and in our current buyer’s market more often. Escrow cancellations is a primary reason experienced agents leave the business. Even the best agents encounter uncontrollable circumstances. Just as doctors will loose patients and attorneys lawsuits, escrow cancellations happen.
When there is no hope in salvaging a deal gone south, the home should be immediately placed back on the market and the listing information should be updated to reflect any new reports obtained during the escrow period and/or price adjustments. The parties should sign an escrow cancellation agreement detailing the disposition of the deposit and releasing each other from further obligations. If there were other interested parties in the home prior to opening the previous escrow, they should be contacted.
Cancellations happen. Not often, but when they do it is important to keep things in perspective and move forward with positive marketing efforts. If one buyer had liked it enough to open escrow, another will likely find the home attractive also.
Between 2000 and 2006 fall-outs didn’t happen. The demand for housing and plethora of lenders willing to make loans to anyone who could “fog a mirror” insured that any obstacles incurred during the escrow process could be overcome. More recently, circumstances have changed and escrow cancellations are becoming all too common.
Preventing an escrow from falling-out is important in any market but especially in a weak buyer’s market. All standard real estate contracts are written “subject to” many contingencies. Sellers and their agents should have as many inspections and reports together early in the listing process to prevent a leading cause of cancellations…the surprise! Every property will have at least one Big Surprise and sellers should discover it early and take preventive action to insure that the buyers are not surprised right out of the escrow. Buyers are demanding clear reports from: pest/termite, well/septic, roof and whole house inspectors. Problem areas need to be corrected before escrow is opened. The goal is to eliminate all surprises.
Buyers will need to line up financing early. Despite pre-qualification and pre-approval letters, about one-third of all escrow cancellations have to do with a buyers inability to obtain financing. Buyers who thought they could qualify for a loan didn’t or they qualified and the lender could not fund the loan. Many large Internet lenders have shut down their web sites, filed for bankruptcy and are defaulting on commitments to borrowers. I am not a fan of large impersonal lenders who use non-licensed telemarketers to pressure borrowers into making bad financial decisions. Local mortgage brokers have more alternative sources of financing when times get tough. There is a reason (“What’s in your wallet?”) Capital One Financial is no longer originating residential loans while your local lender is.
Another reason for a DFT is simply the buyer changes their mind. Standard purchase contracts allow buyers 17 or more days to conduct any inspections or review any reports about the property. During that period of time, if the buyer discovers anything they didn’t expect (surprise) they could cancel the contract and demand a refund of their deposit. Eliminating all contingencies and surprises on time will help the transaction to proceed along on schedule. Experienced agents know the longer a transaction takes to close the greater the risks are that it won’t.
The most frequent reason for an escrow cancellation occurs when an escrow sale is opened based upon the sale of another property. In our current market, buyers should never open an escrow based upon the sale of their home but should sell first and then start looking for a new home. Renting for a few months is preferable to making double payments and having the uncertainly of not knowing if, when and for how much an existing home will bring.
In life stuff happens. The important thing is how we react to the stuff. I recently represented a buyer on a purchase who soon after his offer had been accepted, discovered he needed major surgery and was unable to proceed. The same month an experienced buyer’s agent called to tell me his clients could not qualify for a loan that he assured me was “no problem” earlier that week. I once lost a sale in El Dorado Hills when the buyer’s discovered Serpentine rock in the back yard. Another agent’s buyer was terminated from his employment 5 days prior to closing and unable to close his loan. Years ago I had a client die during the escrow period.
Statistically, in a balanced market, ten percent of all escrows will cancel prior to closing. In a seller’s market less and in our current buyer’s market more often. Escrow cancellations is a primary reason experienced agents leave the business. Even the best agents encounter uncontrollable circumstances. Just as doctors will loose patients and attorneys lawsuits, escrow cancellations happen.
When there is no hope in salvaging a deal gone south, the home should be immediately placed back on the market and the listing information should be updated to reflect any new reports obtained during the escrow period and/or price adjustments. The parties should sign an escrow cancellation agreement detailing the disposition of the deposit and releasing each other from further obligations. If there were other interested parties in the home prior to opening the previous escrow, they should be contacted.
Cancellations happen. Not often, but when they do it is important to keep things in perspective and move forward with positive marketing efforts. If one buyer had liked it enough to open escrow, another will likely find the home attractive also.
posted by Ken Calhoon at 6:39 AM
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