It’s an unfortunate reality that not all real estate deals close as planned.
Sometimes situations change and a buyer or seller can’t or won’t close as planned.
We’ve seen a number of different reasons over the years as to why deals don’t close. Here’s some of the most interesting ones.
- A couple who have sold their home due to divorce has the husband die suddenly and the widow decides she doesn’t want to sell after all, changes the locks and refuses to move out on the closing date.
- A buyer celebrates their successful purchase of a condo by also leasing a fancy new car, only to find their lender doesn’t appreciate them pushing their debt service ratio higher and responds by refusing them a mortgage.
- The deposit cheque is not delivered to the listing brokerage the next morning as overnight the buyers got into a huge fight that resulted in the police being called and the couple breaking up.
The above are interesting because they were quite unexpected. While you can’t predict unusual events like above, there are ways to see problems looming. You can’t always fix a deal but by watching for these some specific signs, you at least can minimize the impact.
Here’s how the process of cancelling a deal works and three warning signs that things are going south.
Real estate deals can either be conditional or firm. A conditional deal is when a buyer agrees to purchase a property, but that agreement is conditional upon certain things. The most common are:
- Conditional upon getting their financing approved
- Conditional upon a home inspection they find satisfactory
- Conditional upon the review of the condo’s status certificate package
These may be the most common, but a buyer can literally make an offer conditional on whatever they want – conditional upon the sale of their own home, conditional upon the spouse seeing the property and liking it when they return from travelling, conditional upon the Steelers winning the Superbowl. The seller needs to agree to the conditions but if both parties agree, then it can be written up and signed.
Conditional purchases are conditional for a set period of time, often three to five days. During this period, the buyer has to do whatever they need in order to either satisfy themselves and waive the conditions, or decide they won’t go through with it. The most common way to write conditions is to have the deal automatically die if the buyer doesn’t provide notice in writing as of the condition due date. If a buyer doesn’t waive the conditions, they have the legal right to cancel the deal and have their deposit returned in full. It’s a pretty straight forward process and unless the buyer is misusing the condition (i.e. a home inspection says the home is perfect and the buyer still wants to use the home inspection condition to back out of the deal) they would have their deposit returned in full and everyone moves on.
A firm deal is when the buyer agrees to purchase the property without any conditions. There is no wiggle room for changing your mind without consequences, it is a firm deal and you are legally bound to complete the transaction as written.
Warning Sign #1 – Too many conditions
Every condition in an Agreement of Purchase and Sale is quite literally a way to back out of the deal. We’ve seen offers on properties with five or more conditions. Some are reasonable, some are unnecessary, and some are very unlikely to be successfully fulfilled. If you have more than two conditions on a deal, it is a sign of a cautious and/or uncommitted buyer who wants to leave themselves a number of “outs” on the deal. Those deals often fail to firm up.
When you have a conditional deal where the buyer decides to not waive a condition or a firm deal where either party decides they want out of the deal, we use a form called a Mutual Release to terminate the deal.
The form itself is very straight forward. It is signed by all parties to the transaction (buyers and sellers) as well as the Brokers of Record for the listing and co-operating brokerages and spells out who is paid out the deposit on the deal.
What is far less straight forward is the process of getting to all parties signing the Mutual Release. Despite the name, in almost all cases it is one side who wants to be released from the deal and who has to convince the other side to let them out.
In a conditional deal that has fallen through, the seller has no choice but to sign a Mutual Release. Given most conditions have short time frames, the inconvenience to the seller is measured in days and it is rare to have seen a market shift or any other change that makes relisting and selling to someone else an onerous task.
When a firm deal encounters problems, it is most often on the buyer side. Whether it is as simple as changing their mind or something more complex such as a change in circumstances that makes the purchase not desirable or possible, when a buyer wants out of a firm deal it can be quite challenging.
In such circumstances, the buyer has to convince the seller to agree to release them from the deal and this often comes at a cost. There is no formula or typical approach and it absolutely depends on the individuals on either side. If a seller is refusing to consider a mutual release, it may cost significant money to get them agree.
In general, courts will rule in favour of the seller as they look very poorly on people who are trying to get out of a written contract. The deposit provided to the listing brokerage may be given to the seller and depending on the market, the buyer may still be liable for additional damages. Lawyers are regularly involved during the Mutual Release process as one or both sides seeks to understand their rights, their options and consequences of different actions.
Warning Sign #2 – No interest in next steps
While the vast majority of firm deals do indeed close, a clear warning sign that a deal may be going south is when the buyer and their agent suddenly stop moving forward with the next steps. This can be as immediate as a deposit cheque not be delivered to the listing brokerage after the firm deal is signed, or it can be as delayed as no purchaser visits taking place in the weeks or months leading up to the closing date. While a lack of communication or activity from the buyer’s side doesn’t necessarily mean there is a problem, when you see one side of the deal acting as if they aren’t planning on closing the deal, you need to find out what’s going on – and quick.
Back to square one…
When a buyer fails to waive the conditions on their purchase or wants out of a firm deal, the seller is left with once again having a property they need to sell.
It can be challenging to re-list a property that was sold (conditionally or firm) as potential buyers are often curious as to what made the last deal fall through. Was it simply something going on with the buyer, or did they realize the property was problematic or that they paid too much for it?
In many cases where a buyer wants out of a firm deal, the seller’s lawyer will advise their client to NOT sign a Mutual Release until it is sold again. As long as the seller’s real estate brokerage holds the buyer’s deposit, the seller has leverage over the buyer. Once it is released, the ability of a seller to go after a buyer remains, but it involves lawsuits and until the courts decide, the money is not given to the seller.
If the failed sale took place in a multiple offer situation, there is no guarantee (or even likelihood) that the same group of bidders will return to the table. Some will have moved on and bought other properties and a large number who are still looking now view the property as tainted in some way. If a lower sale price is achieved than the original sale, the seller may have grounds to sue the original buyer for the difference.
While a Mutual Release situation triggered by the buyer is very stressful to that buyer, it is also an upsetting experience for the seller. They believed the home was sold, they had begun making decisions as to their next steps and what they will do with the proceeds of the sale and so forth. When they are suddenly put back in the position of having to sell, it very much feels like a significant step in the wrong direction.
Warning Sign #3 – Question after question
The final warning sign that a deal may not be going to go as planned is where the buyer or their agent suddenly starts asking all sorts of questions of the seller and the listing agent. Whether it is asking about flexibility on a change to the closing date, enquiring about the seller’s plans after it closes or probing questions about potential problems with the property or area, a surge of questions is often a sign that the buyer is trying to figure out options apart from closing the deal as written.
When a deal falls apart, be it in the conditional stage, or after it has gone firm, it is a stressful, upsetting situation for both the buyer and seller. Whichever side is trying to back out of a firm deal is forced to come up with ways to make the other side agree to release them – and that can be awfully expensive. If you want to avoid a situation like that, make sure you work with agents who know the warning signs and who will make sure things go smoothly. If that sounds appealing, don’t hesitate to get in touch.